Should I hold on to my Vodafone shares?

Q: Is it best not to sell my Vodafone shares now and better to hold on to them as their future may be brighter?

A: It’s easy to understand why any longstanding Vodafone shareholder may consider selling – the share price now is no higher than it was in March 1998. However, the picture is brighter if we look at total returns; with dividends reinvested, Vodafone last month very nearly equalled a peak reached in January 2018, although the shares have since slipped a little.

That’s all in the past though and the rational course now is to assess the company’s prospects and the degree to which they are reflected in the current share price. This is precisely what financial analysts are paid to do and there are various ways for private savers to get access to their conclusions.

First, and perhaps simplest, Fidelity customers can visit our website, navigate to the Vodafone page and select the ‘Fair value’ tab. This gives the share price at which the business is judged by independent analysts at Morningstar to be fairly valued. Their fair value estimate is currently 123.48p. Now we compare that with the current share price to see whether the analysts think the shares are overvalued, undervalued or about right. The share price is currently 117.85p, which we can put in the ‘about right’ category.

Another gauge is the consensus rating of the stock by analysts who work for brokers or investment banks. Their average target price for Vodafone shares, according to LSEG Datastream, is 124.73p, which is within a whisker of Morningstar’s fair value estimate. Of the analysts monitored by Datastream, seven rate the shares a buy, seven say hold and five say sell. That makes their ‘average’ view a ‘hold’.

Datastream doesn’t just collate analysts’ views, it also rates the analysts themselves on the basis of the accuracy of their earnings predictions and stock ratings. A couple of individuals stand out.

Robert Grindle of Deutsche Bank scores 4 out of 5 for his estimate accuracy and 5 out of 5 for his recommendation performance, the highest combined rating of any of the analysts. He is also believed to be the analyst with the longest experience of covering Vodafone. He rates the stock a buy with a price target of 160p.

Barclays’ Vodafone analyst, Maurice Patrick, scores 4 out of 5 for his estimate accuracy and 3 out of 5 for his recommendation performance. In June Mr Patrick downgraded Vodafone to ‘equal-weight’ (in effect, hold) because of his concerns about ‘intense competition’ in the ‘key’ German market. He cut his price target to 110p.

In passing we may note the wide range of opinions of City analysts, despite the detailed scrutiny each devotes to the stock. In fact the lowest price target of those collated by Datastream is 85p (JPMorgan) and the highest is Mr Grindle’s 160p.

We could summarise investment professionals’ view of Vodafone as: neither too cheap nor too expensive but priced appropriately and a ‘hold’ rather than a ‘buy’ or a ‘sell’.

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Three possible futures for Vodafone

Analysts often set out their reasons for their chosen rating and price target alongside alternative scenarios in which the shares might perform better or worse. Barclays’ Mr Patrick outlined the following three possibilities.

The reasons for his actual rating of hold (his ‘base case’): ‘Vodafone has far greater emerging markets exposure than most of our sector peers, and with [its business in] Germany still declining, we believe a discount [in the stock’s valuation relative to similar companies] is warranted.’ He added that the South Africa prepaid market remained competitive, which was weighing on growth, and did not expect competitive pressures to ease in the near term. These arguments led to his actual price target of 110p.

These are the circumstances in which he said his base case might be too conservative (the ‘upside case’): investors might become willing to pay a higher valuation for Vodafone, comparable to that of a leading telecoms company with strong growth prospects, thereby eliminating the discount he referred to in his base case. The upside case would also require better-than-expected macroeconomic conditions in 2026 and beyond. In this event, Mr Patrick said he would expect the shares to reach 150p.

And this is what he said would make his base case too optimistic (the ‘downside case’): continued disappointment in Europe, further reductions in forecasts for free cash flow and worse-than-expected conditions in emerging markets. These developments would drag the shares down to 80p, he estimated.

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Important information: - investors should note that the views expressed may no longer be current and may have already been acted upon. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposesof illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.