Is Now the Time to Buy Vodafone?

I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Vodafone  (LSE: VOD.L  ) (Nasdaq: VOD  ) to determine whether you should consider buying the shares at 160 pence.

I am assessing each company on several ratios:

Price/Earnings: Does the share look like a good value when compared against its competitors?

Price Earnings Growth: Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers

Stock

Price

3-Year EPS growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

Vodafone 160 pence (7.5%) 10.5 5.3 5.9% 15% 1.5

The consensus analyst estimate for next year's earnings per share is 15.2 pence (2% growth) and my dividend per share estimate is 10.2 pence (7% growth).

Let me start by saying that, according to various websites, the current dividend forecast figure for Vodafone is 12 pence per share. However, I'm sure that projection includes a Verizon Wireless-funded special payment, which after this week's results no longer seems on the cards.

So going on Vodafone's own guidance of lifting its ordinary payout by at least 7% this year, I reckon a dividend of about 10.2 pence per share is a more conservative estimate.

Trading on a projected P/E of 10.5, Vodafone looks cheap when compared to its peers in the Mobile Telecommunications sector -- who are currently trading on an average P/E of around 18. However, Vodafone's P/E and low single-digit growth gives a PEG ratio of about 5.3, which implies the share price is very expensive for the earnings growth Vodafone is expected to produce.

The dividend is good, offering a 5.9% yield, which is about the same as the Mobile Telecommunications sector average. Furthermore, Vodafone has a three-year compounded dividend growth rate of 15%.

That said, the dividend is about one-and-a-half times covered, which I think gives Vodafone limited room for further payout growth.

Since September 2010, Vodafone has returned 22 billion pounds to shareholders by way of share buybacks and dividends -- approximately 25% of the firm's current market capitalization.

Vodafone offers a good yield. What about growth?
I think this week's results from Vodafone presented a mixed picture. On the one hand, profits in Vodafone's African business jumped 22% and the group's share of profits at Verizon Wireless in the U.S. gained 25%.

However, in India, Vodafone faces a potential $2.2 billion tax bill, while in Europe, the firm took a 5.9 billion pound writedown and saw revenue fall 13%.

However, it's not all bad in Europe. Vodafone saw a 50% increase in data revenue and a 100% increase in smartphone usage, slightly offsetting lower voice revenues.

Many people, including me, are worried about Vodafone's dividend. Tough trading means Vodafone's current payout represents around 160% of earnings if you exclude the accounting contribution from Verizon Wireless, which I reckon could provide 62% of group earnings next year.

In my opinion, without a regular supply of dividends from Verizon Wireless to back up Vodafone's total accounting profits, the FTSE company could have to slash its own payout.

I do not like uncertainty, and right now there is a lot of future uncertainty around Vodafone. With such a mixed earnings picture and the possibility of the dividend coming under pressure in future years, I believe now does not look to be a good time to buy Vodafone at 160 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Vodafone, I am much more positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond.

You can read this exclusive sectors report -- and all the share ideas it contains -- for free by clicking here.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

Rupert Hargreaves does not own any share mentioned in this article. Motley Fool newsletter services have recommended buying shares of Vodafone Group Public. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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