My Foolish colleague Peter Stephens gave us his thoughts on why we should consider buying Vodafone (LSE: VOD) this week. And hes right; there are some very good reasons for buying the shares. But to present the other side of the coin, I can also see one very good reason for steering clear.
And thats the totally opaque crystal ball I feel Im staring into when I try to unravel Vodafones strategy for the coming years. In fact, Im finding it hard to see anything more than an If you build it they will come hope.
Vodafone is busy building its next generation communications network, certainly. In the year ended March 2015, the company reported capital expenditure of 9.2bn, up 46% on the previous year, with 4G coverage in Europe now apparently covering 70% of Vodafones potential customer base. But theres a big red flag for me when I see that Europe word .
Increasing focus on Europe
While chief executive Vittorio Colao told us he sees stabilisation in many of our European markets, the eurozone is still in a shocking economic state, with recent short-term improvements doing little for its long-term health the zones loosening monetary policy is causing a lot of chafing in Germany, while at the same time being inadequate for the economies of Greece, Spain and the other struggling southern states.
Another aspect of Vodafones strategy that I find mind-boggling is its dividend policy. I suggested recently that Vodafones dividend income stream might actually be reliable, but what eclipses that for me is that, on the face of it, handing out such large chunks of cash right now seems like a nonsensical thing to be doing.
The thing is, although Vodafones forecast dividend yield stands at a massive 5.5% (after 2015s dividend was raised 2% in line with that forecast), it would outstrip earnings per share two and a quarter fold. So Vodafone is paying out in dividends far more than its getting from earnings.
How much debt?
Now, that can be all fine and dandy if a company has piles of cash to cover periods of earnings shortfalls, and its a way of keeping income investors happy. But at the end of the recent year, at the same time Vodafone was shelling out even more dividend cash, it reported net debt of 22.3bn twenty two point three billion! The company is borrowing money to hand out to shareholders.
Then we dont really know what Vodafones acquisition strategy is going to look like. Sure, its been acquiring additional spectrum in Europe and might well be able to find some acquisition bargains, but we heard last month that the firms possible deal for exchanging some assets with Liberty Global is off. And its not that long ago that Vodafone sold off its share of Verizon Wireless.
On the upside, the fourth quarter of the year produced a return to growth (just) with organic service revenue up 0.1% (though Europe was down 2.4%), and theres a 20% EPS growth predicted for the current year. But that would put the shares on a P/E of 34, nearly two and a half times the FTSE 100 average.
Dont buy what you dont understand
So for me, the lack of any real clarity on Vodafones joined-up global strategy (and whether it even has one), underscored by a valuation unquantifiable on current performance and by what seems like a bizarre dividend strategy, my conclusion is wheres my bargepole?
I reckon there are plenty more transparent and reliable shares out there that could help you achieve millionaire status by the time you retire.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
