Because the Vodafone share worth holds agency on Q1 earnings, I am tempted to purchase

Amid the tech inventory sell-off that’s hitting the US, it’s good to see the Vodafone (LSE: VOD) share worth fall simply a few % after Q1 progress slowed.

The telecoms big instructed us on Thursday (25 July) that service income in Germany fell, primarily attributable to a change in TV laws. However even with out that impact, it nonetheless dipped 0.3%.

Total although, we noticed natural service income rise 5.4%, with complete reported income up 2.8%.

Transformation

CEO Margherita Della Valle stated: “Our efficiency within the first quarter is in step with our full yr steering, which we reiterate as we speak.”

Proper now, we’re in early days of Della Valle’s shakeup for Vodafone. Again at FY outcomes time she stated: “A yr in the past, I set out my plans to remodel Vodafone, together with the necessity to right-size Europe for progress. Since then, now we have introduced a sequence of transactions and we at the moment are delivering progress in all of our markets throughout Europe and Africa.“

Up to now, it seems like that’s paying off, as this new replace spoke of constant robust progress in Turkey and Africa.

Valuation

What does this all imply for Vodafone’s valuation, and will we purchase now?

This seems like a gem for dividend buyers, not less than on first look. The forecast dividend yield for the present yr stands at 10.9%, the best within the FTSE 100.

However as a part of the brand new boss’s plans for the agency, that’s set to be slashed by half subsequent yr. Nonetheless, forecasters already anticipate it to begin rising once more from that new stage.

It seems prefer it’s going to be effectively lined by earnings too, and that covers one in every of my earlier worries. With the price of rolling out networks, I simply couldn’t see how the outdated uncovered dividends have been sustainable. I received that bit proper, not less than.

On dividends then, it seems like Vodafone may be one which long-term earnings buyers ought to take into account.

A price entice?

However, trying on the dangerous facet of the equation, I really feel a number of shivers.

We didn’t get any particulars of the corporate’s debt on this Q1 replace. However at FY time, web debt stood at an eye-watering €33.2bn (£30bn). And Vodafone’s complete market-cap’s solely £18.3bn. Gulp!

The shares are presently priced at round 9.5 instances forecast earnings for the present yr, and I’d snap some up at that valuation within the absence of debt.

But when I modify for the web debt, I get an efficient price-to-earnings (P/E) a number of of round 25. That may nonetheless be honest worth if Vodafone’s in for years of robust progress. However I’d fee forecasts on that entrance as solely modestly upbeat.

Purchase, or not?

On the one hand, I like the brand new well-covered dividend prospects. However I actually don’t just like the debt state of affairs. Nonetheless, others like BT Group look set to maintain delivering the money regardless of additionally having massive money owed. However then, any strain on money circulate might imply additional dividend cuts.

Do I sound confilcted on Vodafone? I’m. I’ll maintain off for now.