Stock market

Up 15% in 3 months, but I still wouldn’t touch Vodafone shares with a barge pool

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Vodafone (LSE: VOD) shares are finally doing something they haven’t done for years, even decades. They are actually climbing.

Yeah, I’m surprised too. I already wrote them. After rising to 527p during the final stages of the dot-com bubble in March 2000, the only way left is down. Despite the recent recovery, they trade at just 74.4p today.

When I last saw FTSE 100 In Stock for the Fool, March 17, I pointedly noted that “Vodafone’s share price is falling while I’m buying shares”. It was cheap, trading at 7.1 times earnings, while Blockbuster was yielding 10.4%. Yet I was still not tempted.

A FTSE 100 struggler

Although I accepted that Vodafone would probably recover at some point, it still had many challenges to tempt me.

So naturally, it went well. The catalyst was a strange one. Everyone knew that the dividend was living on borrowed time and would be halved. When the bad news was finally confirmed on May 14, it was greeted with relief.

Vodafone’s full-year 2023 results also provided some good news. While operating profit fell 74.6% to €3.7bn, this was largely because 2022 saw some profitable disposals, with Vantage Towers netting €8.6bn.

Vodafone is selling its Italian and Spanish operations for €13bn, and these were also excluded from the numbers.

With modest 2.2% organic growth and slightly better-than-expected free cash flow of €2.6bn, investors chose to look on the bright side. He also welcomed a €2bn share buyback funded by Spanish disposals, as well as a potential €2bn if the sale of Vodafone Italy is confirmed.

Vodafone shares are now up 14.57% over the past three months, although they are still down 7.75% over the year and 40% over five. Margarita Della Valle is showing progress on its turnaround plan, but without that impressive double-digit production is it still worth tagging along for the ride?

Still a decent income

The dividend cut will take effect in 2025, reducing payouts from 9 cents a share to 4.5 cents a share. Production will decrease, but not as much as I feared. Markets are predicting 7.1 percent a year. It is still one of the highest on the index.

But how long will it last? This is not its first major dividend cut. Vodafone cut shareholder payouts by 40 percent in May 2019 to bolster its balance sheet. If the share price continues to fall and yields rise, we can’t rule out another cut down the line.

There is a chance that Vodafone has finally redeemed itself, and can rebuild from its new lower base. It took a quarter of a century to get there.

Vodafone has moved out of low-margin areas and is growing well in the UK and Africa. However, revenues in the lucrative German market were disappointingly flat in 2023 despite rising inflation. The stock looks well priced, trading at 10.9 times forward earnings. But then I remember it has a net debt of €33.2bn and it reaches my barge pool.

Vodafone has a lot of fans, but I don’t think they are rewarded for their loyalty. The worst may be over but I’m not sure the best of it is worth the investment.

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