Over the last couple of years, Vodafone Group (LSE: VOD) has kept investors happy and supported its share price with a generous dividend. But profits have crumbled.
Adjusted earnings of just 4.6p per share are expected for the year which ended on 31 March. That's nearly 20% less than last year's adjusted figure of 5.55p per share. My feeling is that we are approaching a turning point.
So far, the omens are good. Vodafone reported a 1.2% rise in organic revenue during the final quarter of last year. Project Spring, which has formed part of a £19bn programme of capital expenditure, is now 92% complete. This year should see spending fall and free cash flow rise. The latest City forecasts suggest a 22% rise in adjusted earnings to 5.65p per share.
The only problem is that this isn't really enough to justify Vodafone's 226p share price, or its 11p per share dividend. In my view, Vodafone needs to rebuild its profit margins and take earnings north of 15p per share. Doing this could trigger share price gains.
I expect this to happen over the next couple of years, but it's not a sure thing. There is a risk that profits will stagnate, the dividend will be cut and the shares will find a new, much lower trading level. That's why I think Vodafone is a hold, but not necessarily a buy.
An asset-backed bargain?
Royal Mail (LSE: RMG) faces challenges from the decline in letter volumes, and intense competition in the parcel sector. But it's worth remembering that Royal Mail also has a unique UK-wide infrastructure and delivery network.
I believe investors are focusing too heavily on the problems and not enough on Royal Mail's attractions. This is a large business, which owns a lot of prime real estate. Yet the shares only trade on 1.4 times their tangible net asset value.
Royal Mail's 2016 forecast P/E of 13.2 also seems undemanding, and last year's 21p dividend was covered 1.5 times by free cash flow. This year's dividend payout is expected to rise by 4% to 21.8p, giving a forecast yield of 4.6%.
In my view, the only thing that will stop Royal Mail thriving in this market and delivering attractive shareholder returns is poor management. I think the stock is good value at the current price.
Is this share price fall overdone?
Shares in Prudential (LSE: PRU) have fallen by 22% over the last year, but earnings forecasts for the current year have fallen by less than 5%. As a result of this de-rating, Prudential shares now trade on just 11 times 2016 forecast earnings.
That seems cheap to me, given that Prudential reported a 20% rise in the value of new business in 2015. The group's strong cash generation is also attractive. Prudential generated £3,050m of surplus cash in 2015, more than three times the amount needed to pay its dividend.
I don't see any reason why Prudential cannot continue to perform well. If it does, the shares could prove to be good value at current prices.
However, Prudential, Vodafone and Royal Mail may not be today's best value buys.
The Motley Fool's dividend experts have identified a FTSE 250 company where they believe profits may be about to surge higher.
Improved trading conditions could surprise the market and trigger a sharp move upwards for the shares. In the meantime, the stock offers a generous dividend yield.
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Roland Head owns shares of Royal Mail and Vodafone Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.