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Smart Investor: why cheap Vodafone doesn't tick all the boxes

Invest in Vodafone (VOD.L) now and you get cheap shares in a sound company with an attractive yield. But Vodafone is a strange beast and something significant is missing.

Smart Investor: why cheap Vodafone doesn't tick all the boxes

With a market cap of £82 billion, Vodafone (VOD.L) is the third biggest company on the FTSE 100. But is it too big? Has it tried to become all things to all men and in doing so ended up being just a holding company made up of bits and pieces of other telecoms firms from all around the world?

Strange beast

Vodafone is a rather strange beast. It is a mix of interests in other companies and has had a rollercoaster ride in recent years. It owns 45% of US telecoms company Verizon Wireless as well as having stakes in France’s SFR and Poland’s Polkomtel. Furthermore its profit has been as high as £8.6 billion and as low as a loss of £17 billion over the last 6 years. This unacceptable loss in 2006 prompted a change in strategy, with Vodafone selling assets in order to become smaller, more efficient and more profitable. The idea of acquiring assets to get bigger (as Vodafone did) only to then decide that the company needs to be smaller (as Vodafone is now doing) is a tad illogical but we are where we are...

Vodafone’s background is quite an interesting one. It began as a small mobile operator in Newbury in 1985 (as a subsidiary of Racal) and in just 25 years has become one of the biggest companies in Europe. It operates in 30 countries, employs 84,000 people, owns 224,000 base stations and provides telecommunication services to over 370 million customers across the globe.


In terms of valuation, Vodafone shares appear to be very cheap – especially with the FTSE in the high 5,000s. Net asset value per share is around £1.54 which is just 6p less than the current share price of £1.60. The 6p of goodwill included in the share price is small when you consider that Vodafone is profitable and, with a P/E of 10.5, its shares are attractively priced.

Furthermore, gearing poses little problem, with the company having a debt to equity ratio of 43%. This equates to a very comfortable interest coverage ratio of 13 and as such it is unlikely that Vodafone will cease trading in the medium term. An obvious point perhaps, but one which should nevertheless be checked out.

Free cash flow is impressive. If we take the average of the last five years to smooth out any ‘lumpy’ capex, we arrive at a figure of £7.2 billion per annum – not dissimilar to the average net profit figure, which permits a degree of confidence in the quality of the company’s reported earnings.

But poor performance

Moving on to performance, this is the area where Vodafone scores poorly and is a major reason why so little goodwill is included in the share price. As alluded to above, Vodafone expanded rapidly before having a disastrous year and has subsequently started to downsize and sell off stakes in other companies. This has inflated the net profit figures but even with this turbo boost, return on equity is still relatively poor. For example last year’s net profit figure of £7.8 billion included around £3 billion from the sale of Vodafone’s stakes in China Mobile and Softbank but still only equated to a return on equity of 8.9%. This is no doubt depressed by the fact that Vodafone has a small amount of borrowing (increased borrowing tends to increase return on equity) but it is still poor for an internationally diversified FTSE 100 company such as Vodafone.

Still on the topic of performance, Vodafone’s dividend yield is the eighth highest in the FTSE 100 at 5.56% –mainly due to a generous dividend payout ratio of just under 60%. Dividends have increased year on year for the past few years, but the payout ratio has failed to do the same; probably as a result of volatile profits and non-operating items contributing to the bottom line.

With the value and viability boxes ticked, an investor’s pen should hover over the performance box. Sure, its current management appear to have a clear plan to make the company more efficient and ultimately more profitable. Furthermore they have a fair amount of financial flexibility and an acceptable balance sheet with which to work. However taking a look at Vodafone’s performance over the last 5/6 years highlights the sheer volatility of its profits and the extent of the challenge which management faces.

Can it improve ROE significantly? Absolutely – the only problem is when and, if your first rule of investing is to not lose any money, then you may wish to wait for Vodafone to come out of its transition before you invest. Investing now offers the opportunity to buy cheap shares in a sound company with an attractive yield, but you would be doing so without scoring the company 3/3 on value, viability and performance.

39 comments so far. Why not have your say?

mark senior

Jun 15, 2011 at 07:46

Yes but....... isn't this exactly what a "value" investor is looking for?

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Young Magellan

Jun 15, 2011 at 07:51

I'm ok with that.

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Jun 15, 2011 at 08:02

A very good article ! I always wondered at the obvious lack of milage

in its share price over last 4 to 5 years.Very informative article........

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alan franklin

Jun 15, 2011 at 08:09

Well written - thank you. I hold lots of Vodafone and aim to get lots more. I know of no better, safer investment for a long term dividend investor. Beats "annuities" and money in the bank by a long way!

In the next year or two there will be a strong new dividend stream from Verizon, in which I also have a big holding. Two great companies with a sparkling future. So let's hope the article helps hold the price down while I load up with more shares!

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mark senior

Jun 15, 2011 at 08:18

I'm a holder too, the only reason I will not really push the boat out on Vodafone is the potential competition from Facebook, Twitter and especially Google.

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Graham Hacker

Jun 15, 2011 at 08:34

I agree with previous writers - very good article, informative, to the point and short. More articles like this please, on other top companies....

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Graham McNicholl

Jun 15, 2011 at 09:00

Surely the joker in the pack is Verizon Wireless stake; with virtually no borrowings left to repay what is VW going to do with high cash flow? Any reasonable dividend will increase Vodaphone eps considerably and presumeably a UK dividend increase. As a pensioner they are my present banker for growing yield.

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Jun 15, 2011 at 09:26

This is a very good article and exactly what Citywire should be producing. The analysis could be pushed a bit further. Not exploring the Verizon angle more is an omission. It is also exactly the right share for pensioners looking for income - not high growth and volatile but safe and high yielding. I will be buying more.

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Jun 15, 2011 at 11:01

If telecoms ai nt going to make it hat is ? good divi anyway.

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Jun 15, 2011 at 11:31

Still more tunnel-vision. Vodafone is a poor performer with a good dividend yield. People said BP was a solid, forward-looking company with a good dividend yield until the Deepwater Horizon disaster.

I'll put my money in XP Power and get 197% growth in a year, thanks. I keep a floating stop-loss on the price. If it suddenly drops 20% and the stop-loss kicks in, I've still made 177%. Just a bit more than you'll get from Vodafone.

As far as I'm concerned, "risk" is not having enough money to live on in my old age. I'm 61 and my family is long-lived on both sides. My attitude is that it's far safer to build up a big "cushion" now, and to compound the gains. Relying on big companies like Vodafone and BP for your retirement income I regard as vastly more risky. Elephants don't dance.

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Anonymous 1 needed this 'off the record'

Jun 15, 2011 at 11:39

good article

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an elder one

Jun 15, 2011 at 12:13

Maverick, at 61 you're still a young lad; wait until you're 81 or so; the emphasis changes then. Neither do I dance any more with a schlerotic left leg.

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an elder one

Jun 15, 2011 at 12:27

Maverick, a postscript: check out your cholesterol levels.

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Jun 15, 2011 at 12:45

I hold and plan to retain Vodafone, main risk ongoing is technological - a vast network of wi-fi with Skype enabled handsets might torpedo them.

PS I wonder who in Racal took decision to sell off Vodafone and how much of a bonus did they pick up?

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Jun 15, 2011 at 13:10

Elder One - The whole point of this thread is that you shouldn't wait till you're 81 - you should act now. Or are you perhaps replying while lazing on a beach in the Bahamas?

I am touched as to your concern about my cholesterol levels, but my doctor assures me they're normal.

Could I ask what your definition of "risk" is?

One other point is that the larger the company, the more politics pokes its nose in, and adds a further layer of unpredictability.

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an elder one

Jun 15, 2011 at 13:47

Maverick, risk, in my book is uncertainty of outcome, in various degree. Fact is, I've passed 81 and where you are, I've been there, done that. Sorry! must dash off cooking the lunch. Glad to hear your cholesterol is under management. Your last point is very true, just another parameter to take account of.

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Jun 15, 2011 at 15:17

Quality med term holding - value and yield, yum yum

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an elder one

Jun 15, 2011 at 16:23

Maverick, no quarrel with your philosophy, but at 61 you are nevertheless getting on a bit and will need soon to cut down on risk taking as time runs out - ie. approaching your retirement from toil - to recoup the ever present possibility of a disaster despite your evident skill. Once into retirement one's viewpoint changes and the notion of good revenues from investment in seemingly stable companies becomes more attractive, especially in view of the mess that's been made of pensions in all it forms.

I hold Vodafone, BP ( can't see them going t.ts up just yet ) BAT and the like; I favour commodities for their strategic virtue - food, sources of energy, and raw materials (are the necessities of life in a growing world population, I deem) also a reasonable holding in gold in some form and physical assets such as rare old cars, (would like some land, but can't afford it) as insurance against the Weimar factor. Some of these are admittedly long term possessions, but it's amazing how quickly the political classes and finance can screw things up - you never know when it will happen.

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Jun 15, 2011 at 16:49

I fully agree with AN Elder One.

Maverick !!! He is very right....Take his comments sportily.

Myself and himself have gone past your age long time back.

You do need BP,Vodafone,BAT and all sorts of income generating

assets.But I do not know why elder one wants land.I have two acres

since 1979 with a lovely bunglow on it but i can't eat it ......Can he explain me the rationale ??

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John Osborne

Jun 15, 2011 at 16:52

Well written article, refreshing change after the awful Dummy Investor.

Assuming that Vodafone will distribute the cash or increase dividends from Verizon is a bit premature. The way things go in corporate land usually is the management make a token increase in dividend only, saving the spoils for iniquitious share buy-backs which boost their fat options and keep the city short-termers happy.

Agree with both Elder One and Maverick, I try to sleep at night with the Vodafones Tesco Glaxo S&S for income and diversify into gold, smaller, overseas etc. for capital growth. Strategy has worked for last 10 years.

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Jun 15, 2011 at 18:07

At the end of the day it's all money - it doesn't matter how it arrives, except that capital gains are taxed less heavily than income. I'd just prefer 177% in the year from XP Power (assuming it drops dramatically, which it hasn't yet) than 20% from boring old Vodafone. Call me greedy if you like, but really I'm just an incurable optimist.

Elder One, I am semi-retired - that is, I got bored with the law, and filling in time-sheets, and travelling 60 miles a day to and from an office which will suddenly become a millstone round the partners' necks when cloud computing for lawyers takes off . . . . . I am in the process of setting up a website - nothing to do with investing, or the law!

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an elder one

Jun 15, 2011 at 18:25

Bwanakuba, a nice plot is two acres, it provides one some nice space around one; no you can't eat it but you can eat what you may grow on it, as we did at home during WW2. However in that regard it's just an instinct and memory of things past; I grew up on a farm and left as a young man; land is an asset - another potentially profitable investment - I would think in terms of a little more than two acres not necessarily to live on, but have no strong feeling about it.

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an elder one

Jun 15, 2011 at 19:03

Maverick, off-hand I can't comment on the relative deprivations of income and capital gains tax; daresay you are in the upper echelons of income tax liability, which I ain't; where I can, I use self select ISAs anyway. No I don't think you are greedy - you've worked for it, unlike some.

My own background is engineering; design and development of motor cars - middle management - where salary depends on what the MASSES are prepared to pay for one's product; no regrets though, I enjoyed my job.

I'd be interested to know what is meant by cloud computing for lawyers, is it a joke or a reality.

Good luck with your website.

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John Osborne

Jun 15, 2011 at 19:27

Maverick, surely you are not putting all your money into XP Power, or is that just an example of your type of selection? What happens if the oil price suddenly drops $20?

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Jun 15, 2011 at 20:34

An elder one jus wanted to say how sensible your posts are. From a middle aged one your views are highly sensible regardless of age...investment is for the long term and is not necessarily a race ...more of a long walk. Sure these small caps can be rewarding and enticing can the 2.10 at epsom... after some fast and racy experiences I prefer to invest AND sleep at night.. personal preferences I guess. But elder one please continue to post. Experience is a virtue (or words to that effect)

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Jun 16, 2011 at 08:04

John16 - No, of course I haven't invested everything into XP Power - that was just an example. It represents about 3.2% of my portfolio, but I think that's a bit less risky than the 3.10 at Epsom . . . . .

Elder One - Cloud computing for lawyers means that you give your lawyers notebook computers (or even iPads!) and keep the computer files on the web rather than on a mainframe somewhere in a big office. Your lawyers can then access all their files from wherever they are - on the train, in the clients' offices, at home, on the beach in the Bahamas. What is a law firm's biggest overhead after salaries? The office. So you don't need such a big office, or even, eventually, an office at all. This means that you can cut your charging rate to your clients, which will mean you will gain market share in an enormously competitive market. The law firms who will lose out are those (like Halliwells - Google it!) who have committed themselves to big expensive offices in "prime" locations, which - because everyone else will have caught on to cloud computing by then - you can't sell or let.

Perhaps I should have called myself Cassandra rather than Maverick . . . .

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John Osborne

Jun 16, 2011 at 09:41

Maverick - Giles Hargreave must think XP is good Company also, as was 1.5% of Marlborough Special Situations.

If all of us could achieve average 20% pa on our savings over 10 years we would be doing very well indeed. Luckily for most of us the winners (like XP Power, gold and HL) balance out losers like Lloyds, Ecofin and C&W. However forecasting next years winners is the skill, the verdict is still out with Vodafone but at least it is in a growing industry (for data) and owns the necessary mobile infrastructure. Expanding rapidly in developing countries.

I dont think overall WiFi coverage is possible without considerable investment. Limited at present to a hundred yards unobstructed. Where would all the public hubs be?

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an elder one

Jun 17, 2011 at 14:59

Thanks, Maverick, perhaps it should be called 'cloud nine' then. Though as John16 signifies, access to the cloud looks problematical and not likely soon.

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Jun 17, 2011 at 16:22

Elder One - You don't need wi-fi for cloud computing, just a good high-speed broadband connection. Those offering cloud computing are aware that us yokels as live in the counteree are going to lose out, but given the exponential speed of computer advances I wouldn't bet on them not licking that problem in a couple of years.

That's why I'm setting up a website, and not opening a shop.

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Brian Richards

Jun 19, 2011 at 11:08

I hold Vodafone shares for the dividend and they are a safe company in troubled times. The new directors are selling of minority stakes and Verizon holding is looking to make a nice increase to the dividend ,so what is the problem there is no problem, invest . Spartacus Racal was years ago (Ancient History), the competition you mention has no infrastructure so is not really competition.

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Going loco

Jun 19, 2011 at 14:08

@Maverick - Your example of XP is interesting but like all investing comes down to timing. A buy of Vodafone a year ago at 142 when the trend turned back up followed by a sale at 180 in April this year after the very obvious triple top would have returned 27% gross, an annualised return of about 33% excluding dividends. A buy of XP at the height of the exuberance in March this year at 1975 followed by a sale two weeks later at 1510 would have lost 23% gross, an annualised loss of well over 90%.

Also, for the person who doesn't want to spend an hour or more a day studying investments a share like Vodafone can sensibly be bought for the dividends without worrying too much whether the price of the share goes up or down. A purchase of VOD in a tax-free wrapper in 2002 at (say) 100p would have returned about 64p in dividend income by now (assuming dividends accumulated in typical interest-bearing accounts), plus a capital growth of 60% making 124% total in 10 years, an annual return of just over 8% p.a. compound with no transaction costs. Admittedly that isn't going to be enough to accumulate a viable retirement fund but it's quite hard to find the XPs and buy them at the right time - I'd be very interested to know where you heard about XP, and what persuaded you to buy, and when.


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Going loco

Jun 19, 2011 at 14:08

@Spartacus - Your suggestion that distributed WiFi could take over from the existing network of base stations amused me because it reminds me of the Rabbit network, remember that?

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Jun 19, 2011 at 16:26

Vodafone was one of the shares my broker advised 11 years ago (before I learnt enough to decide on my own), @2.43. It does pay a reasonable dividend, but over the last number of years the shares have been at a healthy loss. I have bought in in the interim at 1.37, .82 and 1.22 thereby reducing my 'loss'.

Se la vie

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pedant landlord

Jun 19, 2011 at 18:55

snoekie: You mean "c'est la vie", surely? (French for "that's life").

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Jun 19, 2011 at 19:03


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Jun 19, 2011 at 20:17

Going loco - I keep a "watch list" of shares, and from time to time add companies - I'm afraid I can't remember where I found XP Power, but I suspect it was Investor's Chronicle.

I then monitor the share's performance for a while, and if I like how the share behaves I will buy it. You do have to accept that with some of these shares you decide to buy them just as they reach their peak, so you get no growth, but you sell those and buy something else. But occasionally you find an XP Power, which just keeps on going (though it may be levelling off now).

I've got better things to do with my time than to monitor Vodafone's shares and buy on weakness. I try not to be a day trader. I prefer my shares' performance graphs to keep going up, and Vodafone's share price is almost exactly what it was three years ago. Even if you get 4% a year dividend you probably haven't beaten inflation.

I would rather buy Acorn Income investment trust (AIF), get 3.4% dividend, and 64% growth over the last year. You also get a rather more diversified investment.

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Going loco

Jun 20, 2011 at 22:16


Thanks for taking the trouble to reply.

My reply to your original comment was really intended to give heart to those who need to play safe by buying big companies which are unlikely to go bust. XP Power does seem OK, but eight times out of ten my own forays into the world of small growth stocks have ended in tears! Perhaps I am looking at the wrong sources of ideas. Or perhaps I should stick to Investment Trusts.

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Jun 20, 2011 at 23:10

Going loco - I just can't get my head round people thinking they're clever to get 8% dividend while the share drops in value by 20% in the year. They have simply lost 12%.

If the share rises in value by 25% but gives no dividend, you can sell enough shares to give you 8%, and even after dealing costs you're probably left with 10 or 12%. But in fact you wouldn't do that, you'd keep your 25% shares and sell the ones in your portfolio that only rose by 10%.

Laid on top of that is the fact that income is taxed more heavily than capital gains, as the personal tax-free allowance for income is £7,475 and for capital gains it is £10,600.

And laid on top of that is the compounding effect. If your share that rose by 25% rises by 20% the following year, you get 20% of 125%.

To me it's a no-brainer, but people with tunnel-vision still have "income portfolios" and "growth portfolios". It's all money, guys.

I remember some of the "big companies that were unlikely to go bust" - like Woolworths, and Marconi, and all those household-name airlines like Pan-Am and TWA and Swissair - and what can be safer than a British bank???

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John Osborne

Jun 24, 2011 at 13:29

Well I did not like to say so, but I bought Vodafone at 114p in 2009. Lucky purchase perhaps, but even at today's less-than-peak price of 163 is a 40% gain in addition to the generous dividends. Anyway the point is that it illustrates the importance of timing in share purchases rather than jumping in on the top of the latest bandwaggon. Am now treating VF as an income generator rather than for tuture gain prospects, even though still on a low P/E.

re. Maverick's point about CGain v. Income, depends on one's personal circumstances and if losses to offset etc.. Continually buying and selling shares for income purposes and getting timing right is not so easy, apart from the paperwork and cost and trouble involved.

I used to have Acorn income but sorry I sold it in crash, big mistake! However now might not be best time to buy again.

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