Back in 2019, telecoms giant Vodafone (LSE: VOD) sliced 40% off its annual dividend as it wrestled with its heavy debt load. Since then, the payout has been flat — and the company continues to have a sizeable amount of debt on its balance sheet. But the Vodafone dividend forecast looks attractive enough that I have bought shares in the FTSE 100 business over the past few months.
Slim chance of a rise
The first thing that strikes me about the Vodafone dividend is how slim the possibility of a rise looks.
From the perspective of financial caution, I think it would be surprising if the board decided to raise the dividend. Although the company has done a good job cutting net debt over the past year, reducing it by a fifth, it still stood at €33.4bn at the company’s financial year-end.
The company has been buying back significant quantities of its own shares. I expect the board would prefer to keep doing that with spare cash rather than raising the dividend as varying buyback levels usually upset investors less than raising a dividend only to cut it again soon afterwards.
Possible fall
It is pretty unusual for a FTSE 100 share to offer a dividend yield of 9.8%.
But that is what is currently on offer at Vodafone. Could that be a signal that some in the City think the Vodafone dividend forecast could include a cut?
I think so. After all, using the company’s definition of free cash flow, last year’s dividend bill of €2.5bn was not covered by free cash flows of €1.5bn.
That could suggest the company needs to cut its dividend to keep it affordable.
But the company’s definition of free cash flow excluded some items like the €8.7bn it generated last year from acquisitions and disposals. Such moves may be one-offs, but they generate free cash that can help relieve the short-term pressure on the dividend.
With a 9.8% yield, even if the firm halved its dividend, the yield would still beat the FTSE 100 average.
Grounds for optimism
That helped me weigh my decision to buy into the company. I think it can benefit from its well-known brand and customer base stretching into the hundreds of millions.
I reckon Vodafone’s heavy spending on share buybacks while cutting its net debt give grounds for optimism that the board plans to maintain the dividend. A new chief executive starting this year gave a perfect opportunity to cut the payout if necessary. But so far it has been maintained.
There is leeway for a future cut (or cancellation). The board provided no Vodafone dividend forecast in its most recent annual results.
The company has strong business assets, an improving balance sheet, and a focus on reinvigorating the business’ financial performance. I am optimistic that the current management team will aim to maintain the payout at its current level.
