The UK stock market has been performing well so far in 2024. Things have calmed down due to the general election, but FTSE 100 Including dividends, it is up 8.5% since the start of the year – obviously a welcome sign given its poor performance since inflation took hold in the second half of 2021. But sadly, not all of the UK’s major companies have been so lucky.
of stocks Vodafone (LSE:VOD) appears to be lagging behind, growing by just 1% over the same period. By comparison, one of its main competitors, BT Groupis up almost 13%. Like many companies with highly leveraged balance sheets, Vodafone seems to be struggling under its own weight, so I won’t be adding this stock to my portfolio anytime soon. But is there hope in the long term?
What is happening with Vodafone shares?
Like BT, Vodafone has been a poorly managed company for many years, with multiple failed turnaround attempts. In 2023, the company is trying again with new CEO Margherita Della Valle, who is being praised for making progress.
A restructuring has seen the telecoms giant sell its operations in Spain and Italy, and last month it raised a further 1.7 billion euros by selling 485 million shares in its investment in Indus Towers Limited.
Management’s strategy is focused on improving the balance sheet and shifting the business focus to the UK, Germany and Africa, the latter of which looks particularly promising given the rapid adoption of the M-Pesa digital payments platform, and which now generates a fifth of the company’s revenue.
Meanwhile, the UK economy is improving and growth is returning (albeit modestly). But if that’s the case, why has Vodafone’s share price continued to stagnate while other stock markets have soared? The answer appears to lie in Germany.
Poor performance in Europe
Inflation is a problem for businesses all over the world. But for telecommunications companies, the operational costs of inflation are usually quickly passed on to customers. Unfortunately, in Germany, Vodafone seems to be struggling on that front.
In the company’s latest financial results, revenue was flat and below the rate of domestic inflation. At the same time, rising energy costs and employee salaries are pushing down profit margins. In Vodafone’s key markets, customers appear to be switching to cheaper alternative providers. Needless to say, this is a pretty big problem.
A chance for revival?
Offering cheaper deals in Germany could be one viable strategy to reclaim lost market share, but for such a move to be possible the company would need to significantly reduce its debt load.
To management’s credit, progress has been made on this front, with total debt and debt equivalents expected to fall from €65 billion to €57 billion between September 2023 and March 2024. But it’s still a lot of debt to contend with — and investors are already feeling the pressure, given that the dividend was just cut in half to prioritize debt reduction.
If this strategy continues to deliver significant debt reduction over the next few years, Vodafone could come back stronger than before, with a dividend. But this is never easy, and Vodafone is not a stock I’d start buying right now, given the alternatives available.
The article The One Stock You Should Avoid Like the Plague in Today’s Stock Market appeared first on The Motley Fool UK.
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Zaven Boyajian has no position in any of the stocks mentioned. The Motley Fool UK recommends Vodafone Group Public. Views expressed on companies mentioned in this article are those of the author and therefore may differ from official recommendations we make in subscription services such as Share Advisor, Hidden Winners or Pro. At The Motley Fool we believe considering a diverse range of insights makes us better investors.
Motley Fool UK 2024
