Interactive Investor

Stockwatch: is it time to buy Vodafone shares?

Vodafone’s finances can look worrying, but analyst Edmond Jackson likes the investment case and believes this director’s share buying is too big to ignore.

19th March 2024 12:26

by Edmond Jackson from interactive investor

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Vodafone logo on a mobile in front of stock market trading screen Getty 600

Share trading by a chief financial officer (CFO) can be the most pertinent to watch given they are closest to company finances, and not being as well paid as a CEO, may mean exercising greater care.

Many director dealings announcements nowadays involve non-executive directors given executives have substantial share option schemes, although such purchases can be to comply with contractual obligations that they hold a certain amount of shares rather than a reaction to value offered.

So it is an eye-popper how Luka Mucic, the CFO of Vodafone, has spent over £1.7 million on shares in the company at 69.6p. It is the biggest share purchase by a CFO I have ever seen. For context, page 191 of the 2022 annual report cites £7 million total annual director remuneration by way of salaries and incentive schemes. It would have been far better to show what each director gets by way of remuneration elements, but still implies he could have staked at least three years of his after-tax income in this deal.

In most situations, such a buy would have electrified interest, but it is a reflection of current jaundice towards telecom stocks, how Vodafone Group (LSE:VOD) slipped nearly 4% yesterday to close at 67.6p. Indeed, BT Group (LSE:BT.A) fell the exact same amount to 105p. In early dealings today, the erosion continued.

It raises stark questions about pricing of FTSE 100 stocks which you would assume is reasonably efficient.  Yet the market is trending opposite to what a CFO implies, screaming value. In one of his annual reports, Warren Buffett has written words to the effect: “A stock that is large and widely followed can be the more irrationally valued.”

Is market right or wrong with Vodafone shares near all-time low?

Its current level is just above the 63p multi-decade low seen just a month or so ago, albeit well down on highs of over 200p in 2014 to 2017. You could regard the chart as potentially in the early stage of building a support level, but this is not in place and a bullish “bowl” formation would be some way off, for what chart folklore is worth.

If consensus forecasts are at all credible, the dividend yield is currently just over 11% based on a payout of 9 euro cents for the year ended 31 March 2024, and about 5.7% based on the planned halving of the dividend for the current financial year. 

In principle, this not only looks a highly attractive yield but, if by any means realistic, implies the stock also at some point will rise. In practice, it flags perception of high financial risks and many investors have been attracted to Vodafone’s yield, then suffered paper losses.

Last November’s interim results to 30 September portrayed a declining dynamic with a 4% reduction in revenue but 44% drop in operating profit to €1.7 billion (£1.4 billion) - classic “operational gearing”. Higher interest rates on €58 billion of net debt then whittled pre-tax profit down by 67% to €550 million and to a net loss after a €705 million tax charge. The only positive being that tax authorities have taken a higher view of profit.

An uneasy income statement continued into the cash flow profile, where investment took €3.8 billion of €5.5 billion generated from operations, down 12%. Some €5.5 billion then justifiably went on repaying borrowings, €1.1 billion on interest and nearly €1.4 billion on various dividends. The total financing outflow was € 6.4 billion and net cash outflow €4.6 billion. So, while the recent dividend policy has been possible, the market has perceived it as not necessarily prudent.

Vodafone - financial summary
Year end 31 Mar

20162017201820192020202120222023
Revenue (€ million)49,81047,63146,57143,66644,97443,80945,58045,706
Operating margin (%)2.77.89.2-2.29.111.712.831.3
Operating profit (€m)1,3203,7254,299-9514,0995,1295,81314,296
Net profit (€m)-5,405-6,2972,439-8,020-92059.02,23711,838
Reported EPS (euro cents)-20.3-7.815.8-16.2-3.10.27.742.6
Normalised EPS (cents)-18.0-9.816.3-6.7-7.92.68.313.0
Ops cashflow/share (cents)53.750.848.847.059.158.062.165.0
Capex/share (cents)52.031.729.329.525.829.131.133.2
Free cashflow/share (cents)1.719.219.517.533.228.931.031.8
Dividend/share (cents)14.414.815.19.28.99.29.08.9
Earnings cover (x)-1.4-0.51.1-1.8-0.40.00.84.8
Return on capital (%)1.03.34.0-0.83.04.14.811.8
Cash (€m)18,25914,95513,46926,64920,64614,98015,42718,722
Net debt (€m)38,79331,31429,51226,30654,27952,78054,66547,668
Net asset value (€m)83,32572,20067,64062,21861,41055,80454,78363,399
Net asset value/share (cents)314271254228229198193235

Source: historic company REFS and company accounts

Yet confirmation on 15 March of the sale of Vodafone Italy to Swisscom for €8 billion upfront cash implies the balancing act stands a fair chance of continuing, versus nearly €2.5 billion going out as dividends – based on the 9 cents per share annual payout - with $4 billion said to be returned to shareholders via buybacks.

Obviously, disposals are no enduring prop, the underlying trajectory of operations is vital. A 5 February trading update in respect of Vodafone’s third quarter to end-2023, cited organic growth of 4.7% despite disposals meaning a slight 1.4% slip in reported revenue. It was reassuring how 14 out of 17 markets were said to be growing.

Nods to modernisation were made by way of Cloud and Internet of Things services growing over 20%, probably small in an overall context. “We’ve also begun strategic partnerships with Microsoft and Accenture to fast-track our transformation,” it said.

Germany edged slightly better, with both reported and organic growth up 0.3% to near €2.9 billion. Yet there appears unease in the market about how this division constitutes a quarter of group revenue and its chief executive of two years is being replaced. Frets also exist about whether a merger with Three in the UK will pass regulatory scrutiny.

The shares do however look to price in much of this distress. If consensus for around €2.0 billion net profit in the current year to 31 March is fair, the forward price/earnings (PE) ratio is around 9x, although it’s unclear quite how realistic is the €2.4 billion profit targeted for March 2025.

With 75% of €61.6 billion net assets constituting goodwill/intangibles, €15.2 billion net tangible assets imply 48p a share – assets ultimately being worth what they can earn.

Significant uncertainty is involved here but my sense is that the CFO thinks this works more in his favour – to grasp substantial Vodafone equity at its current price, despite its "falling knife" semblance.

No disclosed of short sellers over 0.5% of issued share capital

If fundamentals were deteriorating to an extent that it leaves equity value exposed, hedge funds would be over Vodafone like a rash. But you have to go back to 2022 to find any. Marshall Wace, which I tend to regard as a benchmark for well-judged short-selling, went below 0.5% exposure in autumn 2021. Who knows if it is still short?

BT, by comparison, has nearly 2.6% of its share capital out on loan, with AKO Capital having edged over 0.9% on 7 March, while the Canada Pension Plan Investment Board stayed flat at 0.5% and BlackRock, also Kintbury Capital, trimmed theirs slightly below 0.6%. Those are still substantial shorts for a £10 billion company and, as of last September, none were disclosed. To an extent they will be taking a view on telecoms besides BT specifically.

A candidate to average into

For me, the sheer scale of this director buying – and it being the CFO – tilts me towards a sense that the shares have fallen to a level where risk/reward has become attractive. Sentiment is too dire versus Vodafone’s underlying dynamic.

Obviously, most of us do not have the income base of senior telecoms bosses should things not turn out as hoped. But this trade looks an indicator to consider averaging in. Buy.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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