The Vodafone (LSE: VOD) share price has soared over the past few months. Since the beginning of the year, shares in the telecommunications giant are up around 10%, excluding dividends.
And the stock’s longer-term performance is even more impressive. Over the past 12 months, shares in the company have increased in value by over 26%, excluding dividends.
Including investor distributions, the Vodafone share price has produced a total return for investors of 45% over the past year, outperforming the FTSE 100 by 10%.
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After this impressive performance, some investors might be wary of buying the stock as the share price now looks expensive compared to this time last year. However, past performance should never be used as a guide to future potential. What’s more, despite Vodafone’s recent performance, the stock still looks cheap, in my opinion.
Company outlook
Shares in the company have received a boost recently from management’s decision to spin off the group’s tower business. Vodafone has set the price range for a float of its mast organisation Vantage Towers, which could value the firm at about €17bn. Of this, the parent will raise €2.8bn to pay down debt.
Vodafone’s weak balance sheet has always stuck out to me as a reason not to invest in the business. So, it’s positive that management is doing something about this.
Unfortunately, €2.8bn is really only a drop in the ocean for the group. Vodafone’s total net debt stood at €44bn (£38bn) at the end of September.
Still, it’s not the size of the debt that matters. Its affordability. As long as Vodafone can afford the interest payments on its debt, creditors should be happy.
On this front, Vodafone can afford its borrowings. In its last financial year, the group’s interest and financing costs amounted to €1.6bn, easily covered by adjusted operating profit of €4.6bn.
Of course, just because the company was able to meet its obligations last year doesn’t mean it’ll continue to do so. A sudden increase in interest rates or drop in earnings could impact its ability to maintain its debts.
This is the most considerable risk facing the Vodafone share price, in my opinion. Running a telecoms business is very expensive. The corporation needs to acquire new equipment every year, as well as spectrum rights. These two costs amounted to around €8bn in the organisation’s latest financial year. If these costs rise significantly, they could impact the company’s ability to maintain its debt and pay a dividend to investors.
Vodafone share price potential
Still, it seems to me the company is on the right track for the time being. It’s working to reduce debt, and customers appear to be happy with its level of service. The total number of customers using Vodafone’s mobile network across Europe in its fiscal third quarter increased by 1.2m, or 2%.
The stock also supports one of the highest dividend yields in the FTSE 100. It currently stands at around 6% although, as noted above, this distribution isn’t guaranteed.
This distribution, coupled with the group’s potential to grab a larger share of the European telecommunications market, means I’d buy Vodafone for my portfolio today, despite the stock’s recent performance.
