According to Hargreaves Lansdown, Vodafone (LSE:VOD) is one of the most popular UK shares to buy at the moment, based on trading volume. And considering that even professional investors have been upping their stakes, this is hardly surprising. But does popularity mean it’s a good investment?
Let’s explore how this stock has performed over the last half-decade and what the future holds for this business.
Vodafone share performance
As I’ve said on numerous occasions, popularity is not a good indicator of a smart investment. And it seems Vodafone is no exception to this rule.
In February 2017, this stock was trading at 198p. Today, Vodafone shares are priced around 140p. That’s a 30% decline during a time in which the FTSE 100 index delivered returns of around 5%. Obviously, this isn’t a promising start.
However, does this story change when dividends are accounted for? If I’d invested £1,000 into Vodafone five years ago, I’d have 505 shares in my portfolio, ignoring any commission fees. Assuming I didn’t increase or reduce my position during this time, my investment would have generated £149.92 in dividends.
That means the dividend-adjusted value of my investment today would be £849.92, or a loss of 15%. That’s not great. And when taking the average annual 2.5% inflation rate into account during that period, the loss is only magnified.
What happened? And could the future be brighter for the telecommunications giant?
Investigating the problems and potential
There are undoubtedly many factors contributing to the group’s decline. But regardless of the catalysts, the end result has been a shrinking top line with unstable earnings and a rising debt problem. That certainly doesn’t help explain the popularity surrounding this business. But is that about to change?
Looking at the latest trading update, revenue is climbing once again by a grand total of 4.3%. That’s hardly anything to get excited about, but after five years of revenue decline, it’s certainly a welcoming sight. So what’s behind this growth?
Looking deeper into the numbers, Vodafone has managed to expand its customer base throughout Europe while reducing the churn rate from 15% to 13.7%. However, what I find more exciting is the progress made in Africa.
As of the end of 2021, the company served 187.8 million customers in that region, 51.3 million of which are M-Pesa users. As a reminder, M-Pesa is a payment network used by African businesses to accept digital payments even on non-smartphone devices. And in the three months leading up to December, 5.3 billion transactions moved through the network – a 26% increase.
Today, the group’s operations in Africa only represent a small portion of the overall revenue stream. But it has been steadily expanding over the years and could provide a strong growth catalyst for Vodafone shares in the future.
Time to buy?
While the income statement might be improving, the balance sheet has a long way to go. Today, the firm has around €69.5bn (£58.6bn) of outstanding loan obligations. With interest rates on the rise, profit margins will undoubtedly get squeezed.
That’s why, personally, I’m not interested in buying Vodafone shares today, despite their popularity.