While holders of some FTSE 100 stocks have enjoyed wonderful returns over the last five years, the same can’t be said for those invested in telecommunications giant Vodafone (LSE: VOD).
Even a one-time-owner like me is staggered to see how far it’s fallen.
Woeful performance
Let’s cut to the chase: a £10,000 stake made five years ago would now be down 57% in value. Put another way, it would be worth around £4,300. In sharp contrast, the index is up 15% as a whole.
Since loyal investors have received dividends over this period, this isn’t quite the end of the matter. In fact, the company’s dividend yield has long been far higher than the average across the FTSE 100. This means the return hasn’t been quite as bad as that headline percentage.
It’s still pretty awful, though. Moreover, the £17bn cap’s aforementioned yield is mostly the result of its share price continuing to fall rather than a sign of it being a passive income powerhouse. More on dividends in a bit.
Bargain stock?
Of course, this terrible run of form does lead to another question: when might Vodafone be considered a bargain for risk-tolerant Fools? Well, this is where things get interesting.
It’s clear that CEO Margherita Della Valle has made progress in her attempts to streamline the business. Operations in Spain and Italy have been sold. A merger with Three in the UK also received the green light from the Competition and Markets Authority (CMA) in December 2024.
Yesterday’s (4 February) trading update was hardly a disaster either. Group total revenue rose 5% to €9.8bn. Organic service revenue also improved in every one of the company’s main markets with the exception of Germany (down 6.4%). Full-year guidance was maintained too.
Looking ahead, Vodafone’s growing presence in Africa could prove a boon to investors. Should this be the case, the current valuation of 10 times FY25 earnings might prove cheap in time.
But there are still reasons to be wary, at least in my view.
Heavy burden
Vodafone’s debt pile has long been one of the biggest thorns in its side. And while this burden has fallen in the post-pandemic years, it remains substantial. It’s hard to see a quick solution, especially given the high ongoing costs of keeping infrastructure maintained. And this is before we’ve even considered the impact of external economic headwinds. The FTSE 100 might be setting record highs but Vodafone stills looks very fragile.
The company’s higher-than-average dividends also needs to be put in context. Back in 2019, the total payout was 9.24 euro cents per share. The distribution for FY25 (ending 31 March) is estimated to be just 5.3 euro cents per share. So, not only have holders seen the value of their stakes fall by more than half, they’ve been receiving less income to boot.
Perhaps the forthcoming merger with Three UK will mark a line in the sand. Perhaps we may see an incredible recovery in the stock, not dissimilar to those of other top-tier winners like Rolls-Royce and British Airways-owner International Consolidated Airlines.
But a lot surely needs to go right before the market is willing to change its opinion on the company.
With this in mind, I think there are far better value stocks to consider than this one.
