Image source: Vodafone Group plc
Wow! The Vodafone (LSE:VOD) share price has broken though the 80p-barrier for the first time since September 2023. As if that’s not enough, over the past month, the stock’s risen 10%. However, for long-suffering shareholders, this is probably small comfort. Five years ago, in July 2020, the shares were changing hands for around 140p. But with the stock spending most of the past 12 months in the 60s and 70s, I wonder if this is the start of a recovery.
Let’s take a look.
Nothing to see here
The first thing to note is that there’s no obvious explanation as to why the share price has picked up.
Yes, the company did make a stock exchange announcement on 2 June confirming that the merger of its UK operations with Three completed on 31 May. However, this is old news. The deal was first announced in June 2023.
As a result of the transaction, Vodafone expects adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) to be €400m higher during the year ending 31 March 2026 (FY26). But adjusted free cash flow (FCF) will be €200m lower.
Cost and capital expenditure synergies of £700m (€812m) are forecast by the fifth year after completion. And Vodafone expects the transaction to be “accretive” to its adjusted FCF from FY29 onwards. However, this feels like a long time to wait for the full benefit to be realised and, therefore, unlikely to explain the recent share price movement.
Other factors
Another explanation could be that, sometimes, a particular sector becomes ‘fashionable’ for investors. But the evidence on this is mixed.
A look at the movement in stock market valuations over the past month (9 June to 8 July) of some of the largest telecoms companies in Europe doesn’t reveal any discernable trend.
| Stock | Country | 1-month share price movement (%) |
|---|---|---|
| BT | UK | +11 |
| Vodafone | UK | +10 |
| Orange | France | +3 |
| AT&T | US | +2 |
| Swisscom | Switzerland | +1 |
| Verizon | US | -1 |
| T-Mobile | US | -1 |
| Telefonica | Spain | -4 |
| Deutsche Telekom | Germany | -7 |
Or it could be the case that investors now believe the group’s turnaround plan is working.
The sale of some of its underperforming businesses, most notably in Spain and Italy, has enabled the group to reduce its borrowings. Vodafone’s debt has long been used as a possible explanation for investor apathy.
Alternatively, the share price recovery could be evidence that the group’s newly-announced €2bn share buyback programme’s working.
Final thoughts
I suspect the truth is that it’s a combination of all these things and more besides. It’s impossible to know the reasons behind every trade.
However, I think it’s fair to say that the group’s FY25 results and accompanying trading update probably helped. Vodafone’s businesses in Africa and Türkiye are performing well. And organic service revenue was 5.1% higher in FY25 than it was in FY24.
Also, the annual dividend of 4.5 euro cents (3.88p) a share was confirmed. Although never guaranteed, this gives a current yield of 4.8%. The average for the FTSE 100 is 3.5%.
But I still have some concerns. Its German subsidiary, which accounts for approximately 30% of revenue, continues to lose customers. As a result, the group decided to write down the value of the division by €4.35bn.
And its return on capital employed fell 0.2 percentage points in FY25.
However, I’ve long argued that Vodafone’s undervalued compared to some of its European peers. And on balance, I think there are enough positive signs for long-term value investors to consider adding the stock to their portfolios.
