The performance of the Vodafone (LSE: VOD) share price over the past five years has been pretty rotten. Over this period, the stock has declined in value by 47%.
Over the past year, the performance is not much better. The stock has lost around 15% over the past 12 months, excluding dividends paid to investors. Including dividends, the stock has produced a total return of -6%.
By comparison, the FTSE All-Share Index has returned around 13%, including dividends. As such, over the past 12 months, the stock has underperformed the broader market by 20%.
Two headwinds
It looks as if there are a couple of reasons why the market has been avoiding the Vodafone share price over the past 12 months. The two primary reasons seem to be its high level of debt and its declining sales.
The second factor is primarily due to the pandemic. When the pandemic started, Vodafone reported a slump in roaming revenues, a key component of its overall sales. This headwind persisted in 2021, although recent figures suggest it is beginning to ease as the world opens up again.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increased 6.5% year-on-year during the first half.
If this trend continues in the year ahead, it seems likely that the market will start to re-evaluate the company’s prospects. However, without progress on the second major challenge the group faces, it looks likely investors will continue to give the business the cold shoulder.
This second major concern is its high debt load. It has made some progress on this front over the past two years. After acquiring Liberty Global’s European assets two years ago, Vodafone has made a dent in its debt pile by selling off its mobile towers business.
Synergies from the deal have also helped increase profitability, cash flow and reduce costs. With costs falling, the group’s profit margin at its German ops eclipsed 50% of service revenue for the first time last year.
Vodafone share price outlook
All in all, it looks to me as if the company is making significant progress on both of the major challenges it faces. If it continues on this track in 2022, I think it is likely that the Vodafone share price will see a re-rating.
However, I should clarify that there are a couple of risks the group will have to overcome in the year ahead as well. These include rising interest rates, which could increase the cost of its debt. A cost of living squeeze may also reduce consumers’ demand for its products. Both of these challenges could destabilise its recovery plan.
Still, even after taking these potential risks into account, I think the Vodafone share price looks attractive at current levels, considering its growth potential. With a dividend yield of more than 6% on offer as well, I would be happy to buy the shares for my portfolio today.
Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
