Shares in telecommunications provider Vodafone plc (LSE:VOD) have rebounded strongly in recent months after the stock ducked as low as 120p in May of this year.
That drop represented a more than 40% loss of value for the shares, compared to their high of 214p in early 2018. The unexpected announcement in July that it would be establishing a standalone business for its 62,000-strong tower network has driven the share price to recovery, currently sitting at 160p.
I argued, following the Towerco announcement, that it represented a great opportunity for Vodafone to diversify into a new area, and the market is clearly in agreement. But how much further can the share price go? Is Vodafone a double-your-money stock?
Real estate consolidation
Vodafone announced earlier this month that it was closing more than 1,000 shops across Europe as part of a broader strategy to rethink its real estate assets, with the market experiencing a major shift towards digital products and services.
I see this shift as a positive response to changing consumer trends, and while Vodafone may have been slow in recognising such trends, at least action has been taken.
Increased competition within the telecoms market, spurred on by the arrival of many digitally focused rivals, ultimately affected the value of the company during the downturn in its share price.
With its aim of concentrating more efforts towards its digital offering, as well as the development of Europe’s largest tower network, Vodafone has plenty of untapped potential, in my view.
A weak balance sheet does not particularly help its cause, however. Debt levels at the company are worrying, with the acquisition of Liberty Global assets set to push its borrowing upwards of €55bn.
Vodafone has pledged to sell off some of its assets to bring this debt level of down, and the shop closures should go some way to helping that process.
Dividend payouts, which have been traditionally strong from Vodafone, have already taken a hit this year and further cuts could potentially be on the way as well. Regardless, the 40% slashing of shareholder payouts was an admittance by CEO and former chief financial officer Nick Read that action was needed.
All of this says to me that the company and Read are clearly attempting to seriously reduce debt levels and shore up the balance sheet. While I think this will benefit the company in the long run, its share price growth could be remain modest in the next couple of months and into 2020.
With the dividend now at a more sustainable €0.09 per share and Vodafone still generating high levels of cash though, I’m ultimately bullish on the stock. Despite the dividend cut the yield is still more than 5% before any growth in the share price
While doubling your money may be a push, I think a return to 200p could well be on the cards.
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conorcoyle 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