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I Vodafone (LSE: VOD) share price has fallen again, and is down 55% in the last five years.
That’s despite the telecom giant’s turnaround plan. And the 500 million euro buyout announced on 14 November didn’t give Vodafone shares the kick I thought they might. At least, not yet.
What needs to happen for the stock price to start rising again?
The path to growth
Let’s remind ourselves what the new company is all about:
We will simplify our organization, cut through complexity to regain our competitiveness. We will reallocate resources to deliver the quality service our customers expect and drive further growth from the unique position of the Vodafone Business. – CEO Margherita Della Valle, May 2023
That includes cutting the dividend in half. And I wonder if that might be sending mixed messages.
The money isn’t there to keep paying those previous big dividends. But suddenly there is enough room to spend €500m on share buybacks?
Good idea
I can see why investors might be confused. But I think it’s a sensible move.
I like the companies I’m part of to pay ongoing dividends backed by revenue coverage, which Vodafone didn’t. Then pay the extra cash as a purchase, which can help avoid setting profit expectations that the profit won’t be able to support.
Perhaps fear of further dividend cuts is also helping to hold down the price.
It has happened before, when reducing the company’s costs in the first phase was not enough and the pruning shears came out again.
Outlook
Even with the cut, there’s still a 6.7% dividend yield on the cards. And when I look at the dividend forecasts and the forecasted earnings coverage, I like what I see.
Analysts expect the dividend to remain low until at least 2027, which seems reasonable to me. And with earnings per share (EPS) forecast to grow, we could see dividends covered 1.6 times this year, rising to 2.1 times by 2027.
The problem is, I suspect that many investors will want to see real income growth before they believe that the new budget plan will work. That includes me.
Benefits on the way?
It is difficult to read much about the H1 results this year, as we compare it to the reported loss per share in the first quarter last year. Vodafone moderated fixed EPS calculation is 30% before.
That’s a good start, but we may have to wait until the FY results in May 2025 to get a proper handle on acquisitions. The Q3 update in February may provide some hints though.
So what about the share price? Buyers have an average target of 91p on the shares, which are up just 28% in value at the time of writing. That rate would mean a price-to-earnings ratio of just 9 based on 2027 forecasts.
One of the equity investors?
Right now, I think Vodafone should be of great interest to income investors and is worth keeping an eye on. It’s on my watch list of sustainable budget candidates for sure.
I don’t know yet if the words of the return plan will turn into cash.
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