The performance of Vodafone (LSE: VOD) shares has been disappointing recently. Year-to-date, Vodafone’s share price has fallen about 12%. Meanwhile, over the last three years, it’s fallen over 40%.
Does the FTSE 100 telecommunications giant offer value now? Let’s take a look at the investment case.
Revenue growth
One of the first things I always look for when analysing a stock is revenue growth. Over the long term, revenue growth drives earnings growth. This, in turn, drives a company’s share price. Looking at Vodafone’s revenue growth, I can’t say I’m impressed. Over the last five years, revenue has fallen from €48,385m to €44,974m – a decline of 7%.
Looking ahead, the consensus revenue estimates for FY2021 and FY2022 are €44,382m and €45,096m respectively. I’m not seeing enough top-line growth here to get excited about the stock.
Balance sheet strength
Is the FTSE 100 company financially sound? Looking at Vodafone’s balance sheet, debt looks a little high, in my view. In its most recent full-year results, Vodafone reported non-current liabilities of €72,036m versus equity of €61,410m. Meanwhile, the group reported a net debt to adjusted EBITDA ratio of 2.8, which is also relatively high. I think this level of debt adds risk to the investment case.
Dividend analysis
On the dividend front, Vodafone is still paying dividends, which is a plus. Many other FTSE 100 companies have suspended or cancelled their payouts this year, due to Covid-19 uncertainty. Recently, the company declared a final dividend of 4.5 eurocents for FY2020. That takes the full-year divi to 9 eurocents, equating to a bumper dividend yield of 6.5% at the current share price. That’s certainly attractive in today’s low-interest-rate environment.
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However, I do have some concerns over Vodafone’s dividend. For starters, earnings haven’t covered the dividend payout for the last three years. They’re not expected to cover the payout this year either. That’s a problem, to my mind, particularly when you consider the debt the company has on its balance sheet. Debt repayments always take priority over dividend payments.
Secondly, Vodafone recently cut its dividend. That’s another issue for me. I tend to steer clear of companies that have recently cut their dividends. There’s always a chance they could cut the payout again. I prefer to invest in companies that have put together a solid dividend growth track record of at least five consecutive increases.
Valuation
Finally, turning to the valuation, Vodafone shares currently trade on a forward-looking P/E ratio of about 19.5. That looks high to me, considering the lack of revenue growth, high debt levels, and lack of dividend coverage.
My view on Vodafone shares
Weighing everything up, I don’t see a lot of investment appeal in Vodafone shares right now. The company is struggling for growth, and I’ve concerns over the sustainability of the dividend. I think there are much better stocks to buy at the moment.