Shares in mobile phone giant Vodafone (LSE: VOD) (NASDAQ: VOD.US) climbed by 10.8% in May, to end the month at 255p though the price has slipped back a little so far in June, to 242p as I write. In fact, Vodafone shares have been doing very nicely since late last year from the middle of October to today weve seen a 31% rise, and thats in addition to a 5% dividend yield for the year to March 2015:
But though thats a better-than-average dividend yield, its nowhere near covered by earnings, and Vodafones forward P/E of over 40 might cause you to raise your eyebrows a little.
The price of Vodafone has long been driven by rumours or mergers and takovers in fact, since Vodafone sold off its share of Verizon Wireless back in February 2014, its share price has rarely had any logical connection with the companys actual earnings and dividend performance.
And thats exactly whats driving the current share price spike, with Vodafone finally admitting on 5 June that it is in the early stages of discussions with Liberty Global regarding a possible exchange of selected assets between the two companies. Speculation had been rife in the press, and the rumours had had investors reaching for the Buy button for a couple of weeks prior to the fessing-up.
What such a deal would be like is not clear, but that hasnt stopped analysts from guessing that the best outcome might be a swap of Vodafones UK and Dutch mobile businesses for Libertys German operations.
Theres going to be some major structural change to Vodafone some time, of that much Im convinced. Ever since the Verizon sale, Vodafone has looked like a rag bag of unconnected businesses and I really havent seen much in the way of overall focus. Living on the profits from voice services in developing countries while 4G data services are ramped up in Europe has been a reasonable stopgap, but theres little point in being a giant multinational company if youre no more than the sum of your parts.
The big questions are whether a merger (or whetever) will generate the cost savings that should come when disparate operations achieve better synergy, and will such savings be enough to justify the current high rating of Vodafone shares?
For me the answer at this stage is a big fat No. If you buy now youre buying on the takeover rumour, and hoping that any deal will value Vodafone shares more highly than the market does today. If thats your strategy then I wish you well, but Id only buy shares based on the fundamental value of a companys actual underlying performance.
On that score, Vodafones profit expectations just dont justify the shares lofty rating to me.
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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.