Is the Vodafone share price a bargain?

The Vodafone (LSE: VOD) share price has been under pressure. The stock has returned around 5% year-to-date, compared to the FTSE All-Share’s near-8%.

Over the past 12 months, Vodafone has returned 0.4%, excluding dividends. The FTSE All-Share Index has returned nearly 20%, excluding dividends. 

However, I think the stock is now trading at such an attractive level it could be worth buying, especially considering its dividend potential.

Vodafone share price on offer

The first thing I do before buying any stock is try to understand why the shares have performed the way they have recently. 

The stock has been under pressure after the company published its results for its financial year ending 31 March. The results revealed the group earned a profit of £3.8bn last year.

But revenues declined from £38.7bn to £37.7bn. Management blamed reduced income from mobile roaming and handset sales during the Covid-19 crisis for this decline. 

The company’s commitment to spend more in the coming years on developing its infrastructure also spooked investors. Infrastructure spending has always been a headwind for the company. Unfortunately, the group can’t skimp on spending. Vodafone needs to keep spending to stay up-to-date with the competition.

Even then, there’s no guarantee customers will stay with the business. Despite spending tens of billions of euros over the past few decades on new equipment, there’s not much differentiating Vodafone from other mobile providers, apart from price.

This is probably the biggest challenge the group faces. It will need to keep spending to stay up-to-date with the competition. But this doesn’t guarantee the company will achieve better returns than any other in the sector. This could be one reason why investors have been avoiding the Vodafone share price. 

Economies of scale

That said, Vodafone does have one key advantage. Size. Not only is it a european telecoms giant, but the company also has substantial operations around the world. Moreover, the firm bulked up its european business last year with the acquisition of Liberty Global.

Vodafone reckons it can achieve €535m a year in operating synergies as part of this deal. I think this clearly shows how size can benefit the group. If management’s correct, the additional cash flow will fund growth projects and reduce debt.

The company’s chunky dividend yield also supports the Vodafone share price. The stock currently supports a dividend yield of 5.5%. 

While some analysts have speculated that the payout could be cut to fund spending, in the current financial year Vodafone expects underlying cash profits of €15.0bn-€15.4bn, and underlying free cash flow of €5.2bn. I think that will be more than enough to cover the company’s dividend. However, nothing’s guaranteed at this point. 

Still, considering the company’s market-beating dividend yield and economies of scale, I think the stock could be a great acquisition to my portfolio after recent declines. That’s why I’d buy Vodafone today.