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Vodafone (LSE:VOD) shares are finally doing something they haven't done in years, even decades. They are actually going up.
Yes, I'm amazed too. I discarded them many years ago. After reaching 527p during the final stages of the dotcom bubble in March 2000, the only way has been down. Despite the recent recovery, they are trading at just 74.4p today.
The last time I looked at the FTSE 100 stock for the Fool, on March 17, I grimly observed that the “Vodafone's share price has been falling since I bought shares”. It was cheap, trading at 7.1 times earnings and returning 10.4%. However, I still wasn't tempted.
FTSE 100 fighter
While I accepted that Vodafone would probably recover at some point, it still had too many challenges to tempt me.
Naturally, he recovered. The catalyst was strange. Everyone knew that the dividend was being lived on borrowed time and would be cut in half. When the bad news was finally confirmed on May 14, it was met with relief.
Vodafone's full-year 2023 results also provided good news. While operating profits fell 74.6% to €3.7 billion, this was largely due to some lucrative disposals in 2022, with Vantage Towers netting €8.6 billion.
Vodafone is selling its Italian and Spanish operations for €13 billion, and these were also excluded from the figures.
With modest organic growth of 2.2% and slightly better-than-expected free cash flow of €2.6 billion, investors chose to look on the bright side. They also welcomed the €2bn share buyback financed by the Spanish sale, plus a potential €2bn when the Vodafone Italia sale is confirmed.
Vodafone shares have risen 14.57% in the last three months, although they are still down 7.75% in one year and 40% in five. Margherita Della Valle is showing progress in her turnaround plan, but without that fabulous double-digit performance, is the path still worth pursuing?
Still decent income
The dividend cut will take effect in 2025, cutting payments from 9 cents per share to 4.5 cents. Performance will drop, but not as much as I feared. Markets forecast 7.1% annually. It remains one of the highest on the index.
But how long will it last? This isn't its first big dividend cut. Vodafone cut payments to shareholders by 40% in May 2019, in a bid to strengthen its balance sheet. If the share price continues to fall and the yield increases, we cannot rule out another decline down the road.
There is a chance that Vodafone has finally reached its peak drawdown and can rebuild from its new bottom base. It has taken a quarter of a century to get there.
Vodafone has emerged from low-margin territories and is growing well in the UK and Africa. However, revenue in the profitable German market remained disappointingly flat in 2023, despite rising inflation. The stock appears to be a decent value, trading at 10.9 times forward earnings. But then I remember that it has a net debt of 33.2 billion euros and I reach for my barge.
Vodafone has a lot of followers, but I don't think they have been rewarded for their loyalty. The worst may be over, but I'm not convinced the best is worth investing in.
