The Vodafone share price should have seen a big win in 2020. The 5G rollout is ongoing, and has been underlined by the adoption of this new high capacity technology. Apple’s latest iPhone 12 series launch has made 5G mainstream. In addition, lockdowns and the work from home phenomenon have made the need for extra fast bandwidth both on fixed and mobile, even more important.
However, even though Vodafone shares pay a chunky dividend, it would appear that investors have been more focused on company and sector issues, rather than the undoubted opportunity in telecoms.
Vodafone share price in 2020
One of the characteristics of stock market corrections is that the “baby is thrown out with the bathwater.” The general correction in shares in the wake of the COVID-19 wave in March was that blue chips of all sectors were sold off, and this was the case with Vodafone shares.
Indeed, the stock fell from a pre-pandemic peak at 158p in January down to an intraday year low of 92p in March. While there has been a tentative recovery since then, none of the positive fundamentals which have emerged since COVID-19 have been incorporated into the valuation in a material way.
Headwinds for the VOD share price
While the good news for Vodafone and the Vodafone share price is that there is a frenzy of activity in its space, particularly associated with the arrival of 5G, the other side of the coin is competition. This can mean margins are squeezed in order to attract customers.
This is the last thing a company needs when there are also concerns over debt. There is still a massive debt overhang equivalent more than the present £31bn market value from the purchase of Liberty Global.
This has to be worked out of the system in terms of the group’s finances. If one adds in an ongoing battle for Vodafone with the authorities over its operations in India, then those looking for value in Vodafone shares face the problem of a stock which could be regarded as a value trap.
Vodafone shares value trap?
The definition of a value trap on the stock market is a situation where a company’s shares are at the bottom of the range, and it pays an attractive dividend. Such dividends are offered to entice investors into situations where sentiment may be negative.
In the case of Vodafone shares they currently pay out a 7% yield. This is one of the highest dividends in the blue chip FTSE 100. The question now is whether Vodafone shares can afford to continue to be so generous?
The return of revenue for Vodafone shares
What will be key for the VOD share price going into 2021 is whether there will be enough revenues at the telecoms giant to offset the cost of servicing the Liberty Global debt. Selling off its masts business, Vantage Towers, should be a positive move, as announced earlier this year.
However, in order for Vodafone shares to sit with comfortable finances and happy investors, revenues have to start growing strongly. This is even if Deutsche Bank’s 230p sum of parts valuation of the company as compared to the share price of half this level is to be believed. It will therefore be key to see the revenues position on November 16 when the Q2 earnings are revealed.
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Vodafone share price daily chart
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