There’s no doubt about it, the Vodafone (LSE: VOD) share price looks cheap. As I write, I can pick up a share in the FTSE 100 telecommunications giant for just 70.9p. That seems too good to be true.
In the early 2000s, during the height of the dotcom boom, Vodafone was the largest company on the FTSE 100. Since then however, it’s experienced a rather large demise. In the last five years, the stock’s seen 50.6% shaved off its price.
That makes it look like a steal. But is this really the case?
Takeover time?
Vodafone shares certainly look undervalued, trading on just seven times earnings. What’s more, recent rumours of a takeover have provided the stock with some momentum.
A 1 March report from Betaville claimed it had heard talk of interest from a European company. The rumoured bid price of 105p is around a 47% premium to its current price.
Of course, I wouldn’t buy Vodafone stock solely on the back of rumours. But there are reasons to believe it could be an attractive takeover target. For example, it has experienced solid growth in regions such as Africa, which has an expanding customer base.
Earlier this year, it announced a 10-year partnership with Microsoft that will see it offer generative AI, digital services, and cloud solutions to over 300m consumers in Africa and Europe. As part of this, Microsoft will help further scale M-Pesa, the largest financial technology platform in Africa.
Index-leading yield
There’s also its whopping 10.9% dividend yield to consider. That’s the highest on the Footsie. Yet while that looks attractive, I’m wary of a few things.
Firstly, one reason for its meaty yield is due to its dwindling share price. On top of that, I can’t help but question its sustainability. City analysts predict Vodafone’s dividend to fall in the years ahead. That’s a worrying sign.
A stumbling block
However, the major issue for me with Vodafone is its debt. As of 30 September 2023, this sat at €36.2bn. That’s a monumental pile. High interest rates won’t help reduce it either.
The firm plans to trim some fat by disposing of its operations in Spain for around €5bn. It’s also been reported that it plans to offload its Italian business for €8bn.
This will help raise some funds to shore up its balance sheet. Assuming the business uses the proceeds of these sales to reduce debt, this should place it somewhere closer to the €23bn-€24bn mark. That’s solid progress. However, it’s still huge.
A bargain in plain sight?
On paper, Vodafone may look like a steal. But it’s a stock I’ll be avoiding.
There are bright spots with the company. That said, there are too many sticking points. Its debt is a massive issue, in my eyes. And while its yield is tempting, I’m not sure it’s sustainable.
Looking at the FTSE 100, I see better options out there for me at the moment.
This post was originally published on Motley Fool
