Vodafone shares look cheap, is it time to buy?

Vodafone (LSE: VOD) shares have been lingering near their 12-month lows, creating an impression of affordability. Additionally, the company offers an appealing dividend yield. Let’s delve into the details and explore the potential risks and opportunities associated with investing in Vodafone.

Dividend Sustainability

Vodafone’s dividend payout for the fiscal year ended on March 31 amounted to €0.09 per share, currently offering a yield of over 10%. Yet, there are doubts regarding the sustainability of such a high dividend going forward. Projected earnings for the current financial year do not sufficiently cover the dividend per share. Additionally, Vodafone carries a significant net debt of €34 billion. Given the current higher interest rates, the substantial debt level raises concerns about the company’s capacity to maintain its dividend.

Analyst Insights

Telecoms research firm Enders Analysis shares the sentiment that a dividend cut could be on the horizon for Vodafone. Their view is echoed by analysts at Bank of America, who have recently highlighted the risks of a potential 30% dividend reduction.

Share Price Performance

Vodafone’s shares are not only near their 52-week lows but also approaching their lowest levels in more than two decades. This persistent downward trend has understandably raised concerns about the future trajectory of the stock. Although the current price-to-earnings (P/E) ratio of approximately 10 indicates an undervalued stock, it is worth highlighting that the share price could decline further.

Turnaround Potential

The potential for a turnaround in the fortunes of this former FTSE 100 giant is bolstered by two significant developments. Firstly, the recent announcement of the Vodafone and CK Hutchison merger provides a potential catalyst for positive change. Additionally, Vodafone has recently appointed Margherita Della Valle as the new CEO, who recognizes the imperative to transform the company’s performance. In the company’s latest full-year results, Della Valle stressed the need for improvement, stating, “Our performance has not been good enough. To consistently deliver, Vodafone must change.” Under her leadership, a strategic plan has been outlined, focusing on three key priorities: customers, simplicity, and growth. If successfully executed, this turnaround plan has the potential to revitalise Vodafone’s share price and investor confidence.

While Vodafone’s shares currently offer an attractive dividend yield, investors must exercise caution due to concerns about the sustainability of the dividend, high levels of debt, and the downward path of the share price. The appointment of a new CEO brings hope for a turnaround, but the complexity of the company’s operations makes the task challenging.

Not Investment Advice

The information provided in this article by Investomania is intended for general informational purposes only. It should not be considered as investment advice or relied upon by readers for making their investment decisions. Investomania does not provide investment advice, and no content on the website should be construed as such. Readers are advised to conduct their own research and consult with a qualified financial advisor before making any investment decisions.

The author of this article has no position in any of the shares mentioned. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Investomania.