Telecoms companies like Airtel Africa (LSE:AAF) are traditionally popular stocks during economic downturns. I’m considering snapping up the FTSE 100 company today, based on its impressive dividend forecasts.
For this financial year (to March 2024), the dividend yield on Airtel shares sits at a healthy 4.1%. This edges the broader Footsie forward average of 4%.
For next year, the company’s yield improves to 4.6%, and then to 5.2% for financial 2026. While these yields are good rather than spectacular, they indicate that City analysts expect dividends to rise rapidly.
So should I buy Airtel Africa shares for my portfolio?
Dividend coverage
The first port of call is to check whether current dividend forecasts are realistic. City analysts think last year’s reward of 5.45 US cents per share will rise to 5.85 cents in the current financial period.
Dividends are then tipped to rise to 6.45 cents, and to 7.3 cents in financial 2025 and 2026 respectively.
This year’s expected dividend is covered 1.8 times by expected earnings. This is good, but just below the widely regarded safety benchmark of 2 times and above.
However, coverage marches above this key watermark for the following two years. Dividend cover soars to 3.1 times for fiscal 2025 and to 3.2 times for the year after.
Balance sheet
Based on this metric, current dividend forecasts for Airtel shares look pretty robust then. And the outlook gets even better when one looks at the company’s healthy balance sheet.
The firm generates lots of cash, and free cash flow came in at an impressive $990m in the six months to July. This was up 4.8% year on year, thanks to superb earnings growth.
Airtel also has a relatively low level of leverage that could give it the means to raise dividends rapidly, as City brokers predict. Its net debt to EBITDA ratio came in at a modest 1.3 times as of September.
Bear in mind however, that telecoms is a capital-intensive business and leverage could head higher again. The FTSE firm has targeted capital expenditure of between $800m and $825m this year alone as it grows its network.
Why I’d buy
Airtel Africa looks in great shape to pay the dividends analysts are tipping in the near term. And on balance, I expect it to deliver impressive dividend growth over the next decade as revenues and profits rip higher.
The company operates in 14 markets and is, as a consequence, Africa’s second-largest telecoms operator on the continent. It has nearly 148m telecoms and mobile customers on its books, a number which is expected to keep booming as population and wealth levels in its territories explode.
To illustrate the point, Airtel’s customer base rose 9.7% during the first half of this financial year. This, in turn, pushed revenues and EBITDA 19.7% and 21.2% higher at constant currencies, and encouraged the firm to raise the interim dividend 9% to 2.38 US cents per share.
While competition in its markets is rising and those developing markets can be volatile, I still think the company can be an impressive dividend payer for years to come.
