Is Vodafone’s share price set to surge on new VodafoneThree’s £11bn investment plan?
Vodafoneâs (LSE: VOD) share price has struggled over the past year. I think much of this has resulted from market uncertainty over the merger of Vodafone UK with Three UK.
The UKâs Competition and Markets Authority formally approved it on 5 December. However, its official completion was only on 31 May. Vodafone holds 51% of the newly-named VodafoneThree, while the remainder’s held by CK Hutchison Group Telecom Holdings Limited.
New investments and cost savings
The two companies announced on 2 June they’ll invest £1.3bn in VodafoneThreeâs network in the first year. The intention is to take the market leadership position in the UK away from EE and O2. BT owns the former, and Telefonica and Liberty Global own the latter.
They’ll also invest £11bn over the next 10 years to create Europeâs most advanced 5G network, starting with this initial investment.
The parent companies expect the combined VodafoneThree business to deliver cost and capital expenditure synergies of £700m after five years.
The key risk here is any major mishandling in this process of combining the twoâs UK operations. This could negate much of these forecast synergies and be value destructive. That said, consensus analystsâ estimates are that Vodafoneâs earnings will increase by a spectacular 59.3% a year to end-2027.
Are the shares undervalued?
The key element of my assessment of any firmâs stock price is to run a discounted cash flow (DCF) analysis. This shows where any firmâs stock price should be, centred around cash flow forecasts for the underlying business.
Using other analystsâ figures and my own, the DCF for Vodafone shows it’s 44% undervalued at 73p. Therefore, the fair value of its shares is £1.30.
Consequently, all things being equal, I think the stock price could soar as it converges with its fair value over time.
Will I buy the shares?
Even before the merger, which I see as very promising, the firm looked solid to me. Its 2025 results released on 20 May showed reported revenue rise 2% year on year to â¬37.4bn (£31.48bn). Service revenue increased 2.8% to â¬30.8bn.
That said, two key factors prevent me from buying the stock. The first is that I’m aged over 50 and focused on shares that deliver dividend yields over 7%. Its full-year 2025 dividend was 5 euro cents (4.3p), which gives a current yield of 5.7%. This is still better than the FTSE 100 average of 3.5% but doesn’t meet my requirement.
The second reason is the sub-£1 share price, which creates a considerable price volatility risk, in my view. More specifically, at the current 75p price, each one-penny move represents 1.3% of the stockâs entire value! This is way too risky for me at my point in the investment cycle.
That said, I think it’s well worth the consideration of investors who view these factors as less important.
The post Is Vodafoneâs share price set to surge on new VodafoneThreeâs £11bn investment plan? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- 2 top UK stocks I still wouldnât touch with a barge pole
- A £10,000 investment in Vodafone shares, made 5 years ago, is now worth…
- Buying 10,000 Vodafone shares generates a passive income ofâ¦
- Forecast: in 1 year, the Vodafone share price could turn £1,000 into…
- 1 year ago, I said I wouldnât touch Vodafone shares with a bargepole! Was that wise?
Simon Watkins has positions in Bt Group Plc. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
