Why Vodafone shares could be worth 45% more

Some in the City think share price momentum is powerful enough to take out the 200p level. 

While it's probably too early to ask for the forgiveness of income investors, Vodafone (LSE:VOD) has done a pretty good job restoring shareholder confidence since its abrupt dividend cut in May.

This was demonstrated by today's half-year results, when further top-line momentum and an upgrade to full-year earnings guidance helped Vodafone shares rise 3% to 165p. Even though the blue-chip stock has traded sideways in recent weeks, it is now some way from the 10-year low of 123p seen in the aftermath of the company's first ever dividend cut.

Uncertainty persists about the pace of recovery and the cost of rolling out 5G, but it's not too hard to find analysts prepared to back Vodafone shares to go higher still.

They include Deutsche Bank, whose note in the wake of today's interim results included a price target of 240p, implying upside of 45% from current levels. If achieved, it would represent the highest point since 2015. JP Morgan Cazenove is at 220p while UBS has the mobile phone giant trading at 200p, having predicted in June that the negative news surrounding Vodafone looked to be priced in.

Source: TradingView Past performance is not a guide to future performance

The broker's confidence in the company's turnaround prospects has been rewarded so far, with Vodafone shares the fifth-best-performing stock in the FTSE 100 index in the third quarter.

The faith of interactive investor clients is also being rewarded, given that Vodafone was the most-bought stock on our platform in August. It's the fifth most-bought FTSE 100 stock in the past three months and also for the year to date.

Despite the recent 40% dividend cut, investors clearly recognise that a current yield of over 5% still offers great appeal in the low interest rate environment. The company, which today announced a reduced interim dividend of 4.50 euro cents (3.86p), is committed to a progressive dividend policy going forward.

Sentiment is also building thanks to signs of improved trading momentum in Europe and following the company's plans to reduce debt through the IPO of its phone masts business.

CEO Nick Read underlined this progress today when he told investors he was pleased with the speed at which the company was "executing on the strategic priorities" he announced a year ago.

• How interactive investor's SIPP millionaires invest

• Fund spotlight: Schroder Income Fund

• Income hunters can find great funds on ii's Super 60 recommended list of investments

Having returned to top-line growth in the second quarter, with a rise of 0.7%, Read expects to see further momentum in the current half year in both Europe and Africa. In particular, there are improving trends in Vodafone's troublesome markets of Spain and Italy.

The need to invest in its networks and in 5G spectrum auctions at a time of challenging trading conditions led to Vodafone's decision to cut its dividend, particularly after the purchase of European assets from Liberty Global in May 2018 fuelled Vodafone's debt worries with leverage approaching three times underlying earnings.

The question now for Vodafone investors will be whether Read can maximise the benefits of the Liberty deal, as well as boost returns from infrastructure assets and achieve his business simplification goals.

He has been boosted by the roll-out of 5G in seven European markets, with services available in 58 cities with observed speeds of up to 1Gbps. Spain, Italy and Romania launched in June, the UK and Germany in July, Ireland in August and Hungary in October. The 5G network will be available in nine European markets by the end of the current financial year.