At around 74p, Vodafone's share price looks 71 per cent undervalued to me at the moment

Vodafone's (LSE: VOD) share price has more than halved over the past five years.

Part of this came from major shocks in financial markets during that period, including Covid and rising inflation and interest rates. Some may be due to the company's performance at that time.

However, such a drop in price raises the question for me as to whether the stock is now an equally profitable one.

Relative stock ratio

My starting point in answering this is looking at how it compares to one of the key stock ratios I use.

On a price-to-book basis, Vodafone currently trades at just 0.4 – below its peer group by a long way. Specifically, an orange at 0.9, BT Group in 1.1, Deutsche Telekom in 2.3, too Telenor in 2.8.

So it is very cheap at this rate.

To translate this into financial terms, I used a discounted cash flow analysis using other analysts' calculations as well as my own. This means Vodafone shares at 74p are 71% undervalued.

Therefore, the 'correct' price would be £2.55 per share. Given the vagaries of the market, it may go lower or higher than that. But it underscores how bleak the stock appears to be.

What are the firm's growth prospects?

Ultimately, the company's share price and earnings are driven by its expected growth in the coming years.

In 2023, then-CEO Margherita Della Valle laid out her plans to transform Vodafone. This focused on simplifying business, improving customer focus and investing in high-income areas.

One year on and its full year 2024 results on 14 May showed growth in all its markets across Europe and Africa. Environmental services revenue growth was 6.3% year-on-year.

Q1 of its new fiscal year 2025 showed total service revenue up 5.4% over the same period last year. And operating profit jumped by 42.9% to €1.5bn.

The main risk for Vodafone is that this restructuring is unstable at some point. A new 10-year $1bn deal Google announced on October 8 may be another accident. It could clash with the 10-year, $1.5bn deal Vodafone has launched Microsoft in January if not handled properly.

That said, as it stands, analyst estimates for the deal are that earnings will grow by 22% each year through 2027.

Big profit bonus

Last year, Vodafone paid a dividend of 9 euro cents (set at 7.6p). At the current share price of 74p, this produces a stellar yield of 10.3%.

This is one of the top benefits of any FTSE index, with FTSE 100 which is currently around 3.5% and FTSE 250 by 3.3%.

£10,000 invested in stocks at this rate – with compounded dividends – would make £17,888 over 10 years. After 30 years on the same basis, it would have made £206,892 in dividend returns.

That said, for the full year 2024 to 31 March, the company plans to cut the dividend in half before aiming to increase it again later.

I already own many high yielding stocks and am very happy with the prices I paid. If I didn't have these, though, I'd buy Vodafone today with them good harvestextremely undervalued and extremely positive growth prospects.