The Vodafone share price (LON: VOD) has delivered a relatively disappointing performance this year, and over recent years. In 2021 year-to-date, it is down 11% versus a 10% rise for the FTSE 100 index (INDEXFTSE: UKX). Over the past five years it has halved compared to the index’s 2% gain.
Of course, the company has experienced numerous challenges and uncertainties in recent years. Covid-19 caused significant disruption, while its financial performance was arguably less impressive than many investors had expected. This contributed to falling dividends and, ultimately, lower investor interest in Vodafone’s shares.
However, its recent quarterly update showed it appears to be making progress in delivering its strategy. For example, it reported group service revenue growth of 3.3% from improving performance across Europe and Africa. It also disclosed that churn rates among European mobile contract customers were lower than pre-pandemic levels and that it is on track to meet its medium-term goals.
This improved performance is reflected in Vodafone’s profit forecasts. Its earnings per share is expected to rise from 0.08 euros this year to 0.10 euros next year, followed by 0.12 euros in the year after. This suggests that its forward price-earnings ratio of approximately 16 could offer a margin of safety if the firm is able to meet its forecast growth in profit.
Clearly, there is no guarantee that it will do so. Covid-19 remains a threat to the company’s future prospects, while it reported that commercial activity is yet to return to normal conditions. It also faces a highly competitive market, while rising inflation could put pressure on consumer disposable incomes that provides less scope for margin growth over the medium term.
In terms of dividends, Vodafone is forecast to yield 6.8% in the current year and over the following two financial years. Few FTSE 100 index shares offer such a high yield. Therefore, it may be the case that investor demand for the company’s shares rises in a period where inflationary concerns and the negative real returns available from cash and fixed-income investments make higher yielding shares more attractive.
Overall, Vodafone’s share price could deliver an improving performance after a highly disappointing period. The company’s recent performance, growth strategy, income potential and forecasts suggest it may be undervalued relative to the wider FTSE 100 index. Although it continues to face an uncertain environment, this may already be reflected in its valuation on a relative basis.
Vodafone share price
The Vodafone share price opened at 112.00 GBX on 20.10.21.