One of the ways I try to identify undervalued stocks is by screening for companies that have significantly fallen in value over the past year. This can flag up firms that the market has pushed below the long-term fair value. However, not all of these represent a good buying opportunity. In fact, I’ve found one FTSE 100 stock from which I’m going to be staying well away.
Concern over recent results
That company is Vodafone Group (LSE:VOD). The multinational telecommunications company has operations in 21 countries directly and partner networks in another 47 countries, highlighting its broad reach around the world.
For several years now, the share price trend has been lower. Over the past five years, the stock is down 58%, with a fall of just under 27% in the past year. Judging its H1 results released last November, there are several reasons I can identify for the fall over the past 12 months.
For a start, net debt is significant. In the six months covered, it increased by €3.9bn to €45.5bn. Contributing factors to this include dividend payments and share buybacks. Even though the debt-to-equity ratio isn’t ridicously high at 1.73x, it certainly isn’t around the figure of 1 that would be more comfortable.
Shareholders would naturally be a bit spooked by the rising debt levels. Yet potential dividend investors also need to be watchful going forward. The current dividend yield of 8.11% is very attractive. Yet in order to reduce the debt pile, a logical step would be to reduce the dividend payments. By retaining more of the future profits to pay off debt, it leaves less to pay out to investors.
More red flags
The business noted in the report that it’s aiming to cut €1bn of costs by 2026.