FTSE 100 telecommunications giant Vodafone (LSE: VOD) was the most popular buy among Hargreaves Lansdown clients last week. Should I be filling my boots too? Here’s my take.
Why is Vodafone so popular?
Perhaps the most prominent reason for Vodafone’s sudden popularity is that it’s well-placed to benefit from the current rotation into value stocks. Interestingly, pharma giant GlaxoSmithKline, power provider National Grid and Vodafone’s peer BT have also been in big demand.
With the possibility of interest rates rising faster than expected, I fully appreciate why some would seek to ride this (temporary) wave.
Let’s not forget that Vodafone is a favourite among dividend investors as well. A yield of 5.4% is clearly an awful lot better than I’d get from a typical cash savings account. It’s also very attractive, considering the rising cost of living.
Can this momentum last?
As a Foolish investor, I’m not interested in owning stocks for only a few days before dumping them. I’ll leave that to the traders who are happy to trust their ability to time the market. I know this is something I simply can’t do. So, I’m asking whether Vodafone stock is good enough to earn a spot in my portfolio for years.
In some ways, I think it is. Due to the nature of what it does, Vodafone possesses defensive characteristics that many companies would envy. It’s the largest mobile and fixed network operator in Europe and owns a highly valuable brand. It also possesses the continent’s fastest-growing 5G network.
That’s encouraging given the global 5G services market is expected to achieve a compound annual growth rate of 46% between 2021 and 2028.
One might also argue that we’re only at the beginning of this stock’s recovery. Vodafone’s share price may be close to its 52-week high, but it’s still not even back to pre-pandemic levels.
Costly FTSE 100 business
Having said this, I’m also of the opinion that there are far better businesses to buy than Vodafone.
Considering just how costly it can be to keep its infrastructure in good working order (and update it when required), returns on capital are unsurprisingly low. That’s problematic, considering the best stocks to own over the long term tend to be those that bring in a lot of cash relative to the investment required. Margins are also pretty slim in this line of work.
Then there’s the price I’m being asked to pay. Sure, a valuation of 16 times earnings isn’t unreasonable. But nor is it screamingly cheap, considering the amount of debt carried by the company.
Despite highlighting its income credentials earlier, it’s important to note that Vodafone has a consistently inconsistent track record when it comes to hiking its annual dividend. Personally, I’d much rather cash returns were modest but growing every year. This is more indicative of a company in rude health.
My verdict
Having endured an awful 2021, recent activity suggests Vodafone could be in for a better 2022. I can most definitely see the appeal of buying now if I were concerned about the short-term global economic outlook.
As someone with time on my side however, I’m sticking to snapping up quality growth stocks and funds while they’re on sale. Just like Warren Buffett suggests.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline, Hargreaves Lansdown, and Vodafone. 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.
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