There is no doubt about it, Vodafone Group (LSE: VOD) stock looks expensive judging by today’s price/earnings ratio. That puts it at 27.3 times earnings, almost exactly double the FTSE 100 as a whole, which ended last year at 13.66 times.
While valuation is just one figure I look at when deciding whether to buy a company, I am typically reluctant to invest in any FTSE 100 stock trading at such a pricey figure. Unless it’s an exciting momentum stock, such as JD Sports Fashion or Boohoo Group, which Vodafone definitely is not.
Having said that, there are reasons why I’d consider Vodafone for my portfolio. The first is its forward valuation is a more amenable 15.2 times earnings. That suggests we might see higher earnings next year. So today’s P/E ratio alone won’t put me off.
FTSE 100 income hero
The number that catches the eye when examining Vodafone stock is the dividend yield. Few investors expect significant share price growth from the telecoms giant, given that it’s gone nowhere fast for the last 20 years. They demand income though.
The Vodafone share price spiked to a dizzying 459p on 24 March 2000, directly before the dot com crash. It then crashed to 111p by September 2002 and has gone nowhere slowly since. Today, you can buy it at 131p, which makes it 12% cheaper than a year ago.
Yet in the land of the near-zero savings account, the high-yielding stock is king. Vodafone currently offers a forecast yield of 6.1%. That is more than 33 times the average savings account’s 0.18%. No wonder it remains in demand. The worry is that cover is water thin, at just 1.1, but few analysts expect Vodafone to cut payouts at the moment.
Management preserved the dividend throughout last year’s pandemic, as more than half of the FTSE 100 cut theirs. That was largely because it had already imposed a massive 40% cut, in May 2019. I supported the move at the time, as it made the shareholder payout more reliable. So it’s proved.
Germany is now Vodafone’s largest market, and it has remained strong throughout the pandemic. As a result, management group recently posted only a small decline in third-quarter organic revenues of just 0.3%.
Vodafone stock is mixed bag
Vodafone has been relatively resilient against Covid, boosting digital revenues to offset lost sales on shuttered high streets. However, it’s been knocked by the collapse in international travel, which has hit roaming revenues. This arguably makes it a recovery stock, as it should benefit when people finally start flying again.
Management expects to deliver between €14.4bn and €14.6bn in underlying cash profit this year, which includes €5bn in free cash flow before spectrum and restructuring costs. That eases some of my concerns about its high borrowings. Net debt is stubbornly high at €44bn, dwarfing its €30bn market-cap, and hasn’t fallen much for years.
I’m still tempted to buy Vodafone stock, but I suspect there are more tempting income shares on the FTSE 100 right now.