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Vodafone (LSE: VOD) shares can be found in many investor portfolios. It seems they’re drawn to the dividends on offer and the FTSE 100 company’s ‘blue-chip’ status.
The shares haven’t been a good long-term investment however. In fact, over the last decade, they’ve been a complete dud.
Negative returns
Ten years ago, Vodafone shares were trading for about 231p. Today however, they’re changing hands for just 73p. That’s a return of around -68%. If an investor had put £10k into the shares a decade ago, that capital would now be worth just £3,160 – ouch!
Of course, we also need to include the dividends here. These have made a big difference to overall returns. I calculate an investment in the telecoms giant a decade ago would now have a total of 93.94p per share in dividend payments. On £10k worth of shares, that would represent income of about £4,070.
So overall, the original £10k investment would be worth about £7,230. That translates to a total return (ignoring trading fees and platform charges) of about -28%.
Avoiding dud investments
Are there any strategies that could help investors avoid lousy investments like this in the future? I think so. One of the main problems with this stock has been a lack of revenue growth. In 2015, revenue was €48.4bn. However in 2024, it was €36.7bn.
So it could be smart to think about a company’s long-term growth potential before investing. One question I like to ask when looking at companies to invest in is, ‘what’s going to drive revenues here and lead to strong top-line growth?’
Another problem with Vodafone has been its weak balance sheet. In recent years, debt levels have been high and this has hurt the company as interest rates have risen (and servicing the debt has become more expensive). To avoid this issue, investors should spend some time looking at a company’s balance sheet before investing.
Personally, I try to invest in companies that have minimal debt on their books. It’s worth noting that the high level of debt has led to several substantial dividend cuts in the last decade, hurting the stock.
One way investors can avoid this kind of issue is to focus on companies with lower yields and high dividend coverage ratios (the ratio of earnings to dividends). It can also pay to look for companies that are growing their dividends – Vodafone was struggling to grow its payout.
Finally, it can pay to focus on a company’s level of profitability. A good ratio here is the return on capital employed (ROCE). Over the long term, companies with high ROCEs (and room for growth) tend to be good investments as they can generate a high return internally, reinvest that return and then generate an even bigger return. Vodafone’s ROCE has been very low over the last decade – last financial year it was just 3%.
Worth buying today?
Are Vodafone shares worth considering today at 73p? Well, they could be for those seeking value and/or income. The valuation’s undemanding (the price-to-earnings ratio is 11) and the yield’s attractive (6%).
But I reckon there are better stocks to consider buying. I believe there’ll be plenty of shares that outperform Vodafone in the years ahead.
