It’s a fact of life that returns to shareholders are never guaranteed, which means preparing a dividend forecast can be tricky.
Due to its stagnating revenues and falling earnings, I think it’s especially difficult for Vodafone (LSE:VOD). Its disappointing financial performance has weighed on its share price, much to the frustration of its shareholders.
After buying the company’s shares a year ago, I’m down about 30%. Those unfortunate enough to have invested five years ago might be nursing paper losses of more than 50%.
Investors appear unconvinced that the company’s restructuring, intended to improve its profitability and reduced its debt burden, is going to be successful.
And the stock’s yield of 11.4% — much higher than the average for the FTSE 100 of 3.9% — suggests they expect the dividend to be cut soon.
Analysts’ forecasts
Vodafone’s been paying 9 euro cents per annum since it last reduced its payout during the year ended 31 March 2019 (FY19).
Those expecting a further reduction sometimes refer to the forecasts of the 10 analysts covering the stock. The mean of their predictions is for adjusted earnings per share (EPS) of 8.12 euro cents, for FY24.
It’s clearly not sustainable to return 110% of profits to shareholders each year.
That’s probably why the same analysts are expecting a cut in the dividend, to 7.79 euro cents.
But I don’t agree with this pessimistic view.
Structural changes
The company’s in talks to sell its business in Spain. This should realise €4.1bn in cash.
If required, I think the company will use some of this to maintain its present dividend which, based on the current number of shares in issue, will cost €2.4bn a year.
Looking further ahead, the ‘experts’ are expecting EPS to increase to 9.55 euro cents, in FY25. Encouragingly, this is higher than its current dividend. But returning 94% of earnings to shareholders isn’t sustainable for very long.
However, by the time the FY25 dividend needs to be paid, Vodafone is expecting to have sold its Italian division.
Some reports suggest this could raise up to €15bn. Again, if required, some of this could be used to ‘top up’ the payout.
Final thoughts
Although selling off assets to pay dividends isn’t a good idea — especially in an industry where huge investment in infrastructure is required — I see the management team adopting this approach only as a temporary measure.
Given the poor share-price performance, the directors will be doing everything they can to avoid cutting the return to shareholders.
Once the anticipated benefits from the restructuring programme are realised, the situation should improve.
The underlying business is cash positive — €3.1bn of free cash flow is forecast for FY24 and FY25. This is the cash available after it’s paid its operating expenses and funded its capital expenditure.
If correct, the company won’t need to use any of the sales proceeds from Spain and Italy. But it’s comforting to know that if extra cash is required, it’s likely to have this buffer.
Of course, there’s no guarantee that these deals will be successfully concluded. But after several previous attempts, there seems to be a newly found determination to finally address the problem of the group’s under-performance.
That’s why I’m expecting the FY24 and FY25 dividends for Vodafone to be 9 euro cents per share.
