If I’d invested £5,000 in Vodafone shares 5 years ago, here’s how much I’d have now!

Vodafone (LSE:VOD) shares are now changing hands for around 60% less than five years ago. Ignoring dividends, this means that a £5,000 investment in 2018 would now be worth £2,000.

At the same time, the FTSE 100 has increased by almost 5%.

The reasons behind the lackluster stock price performance.

First, revenue and earnings have changed little compared to five years ago.

Financial year (to 31 March)	Revenue (€bn)	Profit/(loss) before tax (€bn)
2018	46.6	3.9
2019	43.7	(2.6)
2020	45.0	0.8
2021	43.8	4.4
2022	45.6	4.0

And, recently there has been no good news.

This week, the company issued a gloomy trading update for the third quarter of the current financial year. Compared to the same period last year, the group’s revenue decreased by 0.4%. Service revenues (mobile and broadband) shrank in Germany, Italy, and Spain. As the German market accounts for 30% of service revenue, this is particularly worrying.

Debt

However, the second problem with Vodafone is debt. The company’s debt-to-equity ratio is around 1.75. This is on the high side for members of the FTSE 100. To put it another way, the company borrows almost twice as much as it acquires.

To add to the problem, the situation worsened. Vodafone’s net debt (borrowing less cash) rose from €41.6bn in March 2022, to €45.5bn six months later.

At the end of January, the company sold its operations in Hungary for €1.7bn. The proceeds will be used to reduce the loan. Management also wants to cut costs by €1 billion over the next four years.

Opinions seem to differ on how successful the current management team is in restructuring the business and delivering the expected returns.

Two large institutional shareholders – Coast Capital Management and Cevian Capital – recently sold their entire holdings in the company. In contrast, the Emirates Investment Authority increased its stake from 11% to 12%.

What do I think?

Despite all this, I think Vodafone is a good long-term investment.

In 2010, the company paid a dividend of €0.09 per last share and an annual dividend yield of €0.09. And, the board is committed to staying at this level (or higher) over the medium term. This means the stock is currently yielding 8.8% – higher than the FTSE 100 average of around 4%.

With stock prices near all-time highs, now is also a good time to reinvest dividends received. This will enable me to benefit from compounding, which Albert Einstein is reported to have said (he probably did not) as the eight wonder of the world.

An investment of £5,000 in Vodafone shares should return £441 in dividends next year. Based on the current stock price, this could buy another 490 shares in the company. In the following year, £480 of passive income can be earned, enabling 533 more shares to be purchased. And so on.

I’m not Einstein, but even I can see the benefits of reinvesting dividends.

I already own shares in Vodafone. But, if I had the money, I would buy another one. Although it will never achieve the status of the UK’s largest listed company, I am confident that the company will continue to grow.