Image source: Vodafone Group plc
When I'm looking for a solid dividend investment for my stocks and shares ISA, I'm not just looking for a solid yield. I also want strong asset price growth or a great valuation.
Vodafone (LSE:VOD) is in an exceptional position right now for a value investor like me looking for good cash flow. With an impressive yield of 9% and a price-to-sales (P/S) ratio of 0.66, I am very tempted.
Cash flow and good value
I think a strong cash flow is one of the most attractive aspects of an investment. After all, we use pounds to pay our bills, not stocks.
Vodafone has a strong dividend track record, with an average 10-year yield of 6.7%. This yield has increased significantly over time, but the main reason is that its share price has plummeted.
While that was worrying to investors in the past, I think we are now at a point where the valuation is so low that the price will start to rise again soon.
The group has reported negative earnings and revenue growth over the past three years on average. However, analysts estimate that its revenue will grow by approximately 2% per year over the next three years. Furthermore, its earnings per share are estimated to grow by 32.5% per year over the period. Therefore, I think we are at the bottom of the prolonged price decline for now.
Facing risks
However, the company faces broader risks. It has recently faced challenges in key markets such as Germany, where it is struggling to retain its traditional cable TV customers. In addition, its performance in Spain and Italy has been weak recently, with year-on-year sales declines reported in both countries.
Furthermore, the company has a weak balance sheet at the moment, with high levels of debt. It is also under scrutiny from the UK's Competition and Markets Authority for its merger with Three UK. This merger is seen as vital for Vodafone and Three to compete with larger players such as EE. However, it could destabilise the dividend if problems arise with the integration of the two companies.
Stay alert
Because the company has a history of losing value, a large merger in progress, and growth rates that have contracted recently, I will need to monitor it frequently if I buy its shares.
A dividend yield of up to 9% is incredibly rare and might seem like a gift. But in the worst case scenario, the share price could fall even further. Most likely, this is a value trap, where the price remains depressed and fails to grow again despite improved earnings and higher revenue growth on the horizon.
But I still think it's worth investing my money. Standard & Poor's data shows that the average annual total return of the S&P 500 Index From 1926 to 2022 it is about 10%. That is barely higher than Vodafone's dividend yield alone.
Moreover, I think the stock could trade at a slightly higher price-to-sales ratio of 0.75 in 18 months. This is close to its 10-year average of 1.1. Therefore, if it hits the analyst consensus sales estimate of $42.6 billion in March 2026, it could have a market cap of $32 billion. That would mean 23.5% growth from its current valuation of $25.9 billion.
I'm considering it
I learned from Warren Buffett that it's not the quantity of investments I make that counts, but the quality of the ones I choose. So, I'm taking my time with this decision. Vodafone is going to be on my watch list for now.
