I’ve grown so used to the Vodafone Group (LSE: VOD) share price going nowhere slowly that it’s a real shock to suddenly find it has gone somewhere – and fast. After years of gentle drift, it is suddenly up almost 25% in just three months.
Back up to speed
I’d like to say I had predicted this, so let’s take a stroll down memory lane to the last time I looked at Vodafone, in May. It had just cut its dividend for the first time since 1990, and by a whopping 40%, but I said that given the 10% yield this was the right call, especially since investors were still getting 6.5% at the time.
I called the FTSE 100 stalwart a hold rather than a buy, but subsequent history suggests I was too cautious. My colleague Rupert Hargreaves deserves kudos for sticking his neck out and hailing Vodafone as an unmissable buy, as management pursued non-core disposals to reduce borrowing and produce more capital to reinvest in the business.
So what’s behind the recent jump? It’s began with last month’s positive update, as Vodafone stated it was confident of meeting its revised adjusted earnings (EBITDA) target of €13.8bn-€14.2bn, and free cash flow of “at least” €5.4bn for the full year.
It was the news that Vodafone was going to sell off 60,000 mobile masts for around €20m, through a potential IPO of new standalone firm TowerCo, that really got lines buzzing. This will create Europe’s largest power company, with masts across Germany, the UK, Italy and Spain, allowing it to lease mast space to rival mobile networks.
This will also address one of the biggest investor concerns – Vodafone’s daunting pile of debt, which hit around €48bn after the debt-financed €18.4bn purchase of Liberty Global’s German and eastern European cable assets. With Vodafone also spending billions of euros at European spectrum auctions, S&P recently downgraded it from BBB+ to BBB, with a “stable” outlook.
Pulling out of New Zealand and sharing 5G technology with O2 in the UK will help cut costs, although Vodafone still faces plenty of operational challenges, including tighter regulation in South Africa, and challenges in Spain and Italy.
It’s a long-term buy-and-hold
Vodafone has shown it still has the power to surprise and impress the market, me included.
Analysts reckon the £40bn global behemoth is on course to boost its earnings per share by 66% this year, and a further 22% in the year to 31 March 2021. The forecast yield is currently 5.5%, above the FTSE 100 average of around 4.3%, although only covered once by earnings. By contrast, you would be lucky to get more than 1% on a Cash ISA, and that could fall if the Bank of England cuts interest rates, as many suspect it will.
The Vodafone share price is a little expensive trading at 21.6 times forward earnings, although a PEG of 0.3 looks better. Naturally, you should have bought it three months ago, but if you’re after a long-term buy-and-hold, I’d still buy it today. Vodafone has shown that is is more than just an income play. You might enjoy some capital growth as well.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019