Vodafone (LSE:VOD) is a FTSE 100 stock that’s significantly underperformed the market. Over the past year it’s fallen 23%, whereas the Footsie’s increased by more than 10%.
And it’s easy to see why.
Busy getting nowhere
Since 2019, revenues have remained broadly flat and it’s starting to lose market share in a few key territories.
Some of its issues are industry-wide but others are company-specific.
A recent analysis by Barclays found that the telecoms sector invests more money than 13 others but earns less than most of them.
In the UK, Romania, Italy, Spain and Germany, this telecoms giant delivers a return equivalent to — or below — the cost of funding its operations in these countries.
This is madness and clearly unsustainable. As a shareholder, I find this frustrating.
Ringing the changes
But Vodafone’s now embarking on a strategy of cost-cutting and reorganisation.
It plans to simplify its corporate structure and dispose of some of its non-core operations. It’s exited Hungary and Ghana, and Spain may be next.
And the company has recently announced plans to merge its UK operations with Three.
Although its large borrowings are still a problem, it’s been using some of its disposal proceeds to reduce this exposure. At 31 March 2023, its net debt was €33.4bn, equivalent to 2.5 times earnings. A year earlier it was €41.6bn (2.7 times).
Big returns
The declining share price and static dividend have pushed the yield to over 10%.
Such a high yield could indicate that the market expects the dividend to be cut soon. If correct, the shares can be thought of as a value trap — that’s the trick element of my headline.
More optimistic investors will view a 10% return as a buying opportunity and might treat themselves to a few shares.
Evidence
So which is it, trick or treat?
Although I’m sure the directors will be doing everything they can to maintain the present level of dividend, I fear that if the performance of the company doesn’t improve soon, the payout will be cut.
My nervousness is based on a lack of headroom, as measured by dividend cover.
| Financial year (31 March) | Interim dividend per share (€ cents) | Final dividend per share (€ cents) | Total dividend per share (€ cents) |
| 2014 | 4.28 | 9.44 | 13.72 |
| 2015 | 4.73 | 10.98 | 15.71 |
| 2016 | 4.65 | 9.83 | 14.48 |
| 2017 | 4.74 | 10.03 | 14.77 |
| 2018 | 4.84 | 10.23 | 15.07 |
| 2019 | 4.84 | 4.16 | 9.00 |
| 2020 | 4.50 | 4.50 | 9.00 |
| 2021 | 4.50 | 4.50 | 9.00 |
| 2022 | 4.50 | 4.50 | 9.00 |
| 2023 | 4.50 | 4.50 | 9.00 |
The 2023 dividend cost €2.884bn. Removing exceptional items, this is equivalent to 79% of the company’s profit after tax. A general rule of thumb is that this should be no more than half of earnings.
Vodafone’s taken the decision to pay more than this. And some analysts think this is unsustainable.
The average of the forecasts of the 15 analysts covering the stock is a dividend per share of 7.8 cents in 2024, and 7.93 cents in 2025. This doesn’t sound too promising, although the most optimistic prediction is a return to shareholders of 9.38 cents in 2024, and 9.57 cents in 2025.
So far there hasn’t been any indication from the board that the dividend will be reduced. All eyes will therefore be on the 2024 half-year results, which are due to be released on 14 November 2023.
Verdict
If I didn’t already own some shares, I wouldn’t consider buying any until after the results.
A dividend cut could drive down the price. And with benefits from the structural changes several years away, it might take a long time to recover. But of course, it could recover strongly too. Only time will tell.
