Why Are Vodafone Shares Cheap?

VIDEO: The latest in our series looks at narrow moat Vodafone

James Gard 11 October, 2021 | 10:16AM
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James Gard: Each week we look at one stock that is cheap or expensive and why. This week it’s the turn of telecoms company Vodafone, which has a 4-star rating.

The company’s shares have softened this year as the recovery as its key European markets have slowly recovered from the pandemic. This is especially true in Germany, Vodafone’s most important by revenue, where Lockdowns have reduced demand for mobile data services and curtailed marketing spend.

Morningstar analysts think the shares are attractively valued at around 110p, way below their fair value of 185p. Despite a dividend cut before the pandemic, the currently stock yields nearly 7%, much higher than the FTSE 100 average.

What’s going in Vodafone’s favour? It has massive scale, serving around 270 million wireless customers globally, which few of its competitors can match. Vodafone networks also tend to rank highly in terms of quality, meaning that customers are willing to pay a premium. These factors combine to give the company a narrow economic moat.

Although Europe is Vodafone’s stronghold, it has access to emerging markets like India, where growth opportunities are higher. Europe, after all, is saturated with smartphones, but rates are lower in developing markets, where the number of potential customers is much higher.

In Europe, Vodafone has also started to streamline its operations, to improve efficiency and enhance the value of underlying assets. An example is the recent flotation of its European mast business Vantage Towers, which was spun out of Vodafone Germany.

For Morningstar, I’m James Gard.

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James Gard  is content editor for Morningstar.co.uk