Thanks to a depressed share price, we see huge dividend forecasts for Vodafone (LSE: VOD), with a 12% yield.
Broker forecasts suggest that will hold up too, at least for the couple of years they’re looking ahead. If it starts to appear they’re right, might it help push the share price back up in 2024?
Vodafone shares are down a whopping 60% in the past five years. They haven’t been at levels as low as this since before the dotcom boom at end of the last century.
Here’s what I don’t like
Before I think more about these dividends, I want to look at something I don’t like about Vodafone. It’s shared with BT Group too, and I’m talking about debt.
At the halfway point this year, net debt stood at €36.2bn (£31.1bn). Yes, that’s billion.
It’s an improvement on the €45.5bn (£39.1bn) at the same point the year before. But it’s still way higher than the firm’s £19.4bn market cap.
It’s almost like we’re buying shares in a pile of debt, and the managers are running a telecoms sideline to try to pay the interest.
Same again
Over at BT, with a market cap of £12.4bn, net debt rose to £19.7bn by the and of H1, even ignoring the pension fund deficit. But that’s a story for another day.
It does, though, just seem the wrong way to go about business to me. Most big firms have some debt funding. And it can be a big benefit.
If a firm can grow faster, even after servicing the debt, that can get more money into shareholders’ pockets in less time. But too much debt means too much risk for me.
Why worry?
Still, there’s one key question here, and it applies to both of these telecoms giants (and to other big dividend stocks, I guess).
If the companies can keep paying the cash, year after year, why worry about what goes on behind the scenes? After all, the annual dividend payment is quite small compared to the debt pile.
So, if I buy the shares, and they pay me big money each year, what else matters?
Isn’t that the best kind of investment, one we can completely ignore and just pocket the cash?
Investors don’t like it
Well, looking at that share price decline (and BT is down 50% in five years), the big investors clearly do seem to think other things matter.
But, at least at Vodafone, change is afoot.
To quote new CEO Margherita Della Valle: “Our performance has not been good enough. To consistently deliver, Vodafone must change. We will simplify our organisation, cutting out complexity to regain our competitiveness.“
Will that mean dividend cuts? We don’t know yet.
Share price rebound?
Might this renew investor confidence in the firm, and get the share price moving up?
I do think it could. If Vodafone can show positive change in the coming year. And if it can do so without any great threat to the dividend yield.
But these are big unknowns. I’ll stick with my low-debt stocks.
