The Vodafone (LSE: VOD) share price is tumbling again, as its 2022 roller-coaster ride continues. The shares climbed as we approached the telecoms giant’s third-quarter update in February. But the price soon started tumbling again.
It’s currently on a 12-month fall of 10%. So what’s happening, and am I seeing a tempting buying opportunity now?
There are conflicting issues pulling me in both directions, and the share price chart suggests the market sees it the same way.
Vodafone dividends
Vodafone, for years, was a byword for reliable dividends. The problem was, that included years when the company couldn’t afford it.
The dividend was slashed by 40% in 2019, but still provided a 5.5% yield. Yet anyone looking solely at that and thinking it must be a good thing is missing a crucial point.
The yield only looked good because the Vodafone share price was on the slide. Over the past five years, Vodafone shares have slumped 40%. What you win on an unaffordable dividend, you lose on a collapsing share price.
Since then, the dividend has remained constant, yielding 5.8% in 2021. If Vodafone can maintain this level, it really might be a good passive income buy for the long term.
Defensive shares
The current economic climate suggests another reason for me to buy Vodafone shares today. Telecoms companies are generally quite defensive. When inflation kicks in, people (and companies) tend not to cut down on telecommunications usage.
The more people there are cutting down on travel and nights out, the more there are sitting on sofas and streaming movies, games and music. Telecommunications, particularly data communications, seem to be an essential purchase today.
And thinking of economic things, Vodafone’s business reaches many places around the world. Mobile telecoms is increasingly a must-have in emerging economies like those of Africa.
Debt and cover
So if I think these good things about Vodafone, why haven’t I rushed out to buy some shares? Well, one thing I really don’t like in companies I own is debt. And Vodafone has a huge mountain of it.
At the halfway point this year, its net debt stood at €43bn. That’s a fraction more than the market cap of the company itself. Wow. I’ve just had to pause for breath again.
And then back to the dividend. It might have been steady for a couple of years. But it’s still not covered by earnings. We have a company with massive debt, paying uncovered fat dividends, and in the midst of a big share buyback programme.
I just don’t get it
Why? That’s the big question for me. How does that make any financial sense?
I think the dividend is key for the future of the Vodafone share price. Should earnings rise to cover the dividend adequately, I can see the shares gaining and investors enjoying years of passive income. But if not, I’d expect a future dividend cut.
So will I buy? Warren Buffett has famously said we should never invest in a business we cannot understand. I can’t understand Vodafone’s cash management strategy. That’s enough to keep me out.