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Is the Vodafone share price really a bargain buy?

T Sligo
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The Vodafone (LSE: VOD) share price has slumped by over 15% year-to-date.

As the market crash has knocked share prices down across the board, value investors will be on the hunt for a bargain buy. I have no doubt Vodafone is on some of these investors’ radar.

But just because a share has dropped in value, it doesn’t mean it’s a bargain. Investing in out of favour stocks can be a real risk if thorough research isn’t undertaken. It might be cheap for a very good reason.

So does the Vodafone share price tick the bargain buy box?

The Vodafone share price

Vodafone’s share price has been on a downward spin for several years now. In the past five years, its value has plummeted by 45%. That being said, the stocks are showing a slight recovery. Since its low points in March, the shares have rebounded by roughly 27%.

With this in mind, the shares have a price-to-earnings ratio of 24. This is higher than other FTSE 100 companies. Therefore, I’d question why some are branding Vodafone as a value investment opportunity. I think this is a bit of a red-herring.

The Vodafone share price has slumped, but nowhere near enough for me to class it as a bargain.

Word of caution

So the Vodafone share price isn’t that cheap. That’s not necessarily a problem. There are plenty of shares, like Unilever, that I love but certainly aren’t trading at bargain levels. Sometimes you have to pay a bit extra for a business that will return value to you over the years. As Warren Buffett says: “It is better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

That being said, I’m not entirely convinced that Vodafone’s share price fits into this category either. It’s operating in a highly competitive field, and in my view doesn’t have a strong competitive edge against its rivals.

There is a bigger problem for the company, though. It’s carrying a significant amount of debt. However, the business is now cutting costs and focusing on its core activities, which should shore up some capital. It has disposed of its New Zealand outfit and reduced its dividend in 2019.

In May, the company reported that full-year revenue had increased by roughly 3%. Disappointingly, however, the group still made a loss.

Although Vodafone’s prospects – with the roll out of 5G – sound promising, this will take a significant amount of capital outlay before any benefit is realised.

The strongest case for owning Vodafone shares has been its dividend. Like fellow-Fool Alan Oscroft, I’d question whether a company with debt should be paying away a significant amount of its cash to investors. Currently, the shares are yielding roughly 6.3%. I’d rather see the company reinvesting this money, or paying down its debt obligations.

For me, the Vodafone share price is still not cheap enough to buy. It is carrying too much debt for me to class it as a wonderful company. For that reason, I’d avoid buying its shares at the moment.

The post Is the Vodafone share price really a bargain buy? appeared first on The Motley Fool UK.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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 2020