This FTSE 100 stock halves its 11% dividend yield next year. What now?

After working on its turnaround, Vodafone is set to slash its generous dividend yield. So should I keep holding or is it time to sell?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Vodafone Group plc

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Vodafone (LSE:VOD) has announced that it will be cutting its hefty dividend yield in half from 2025.

The news follows five years of declines that have stripped over 50% off the share price. So I’m surprised it kept its high yield (currently 11%) in place and waited this long to take action.

Created with Highcharts 11.4.3easyJet Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

While dividend cuts mean lower returns for shareholders, struggling companies typically benefit from reinvesting capital rather than paying it out. In the long run, this could be a win for everyone if the reinvestment helps drive future profitability.

Should you invest £1,000 in Vodafone right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Vodafone made the list?

See the 6 stocks

Of course, there’s also the possibility that it scares away shareholders from an already declining investment. Vodafone seems to be placing a courageous bet on the faith of its shareholders.

It’s a careful balancing act and I fear Vodafone was tipping the scales for too long.

Could it work?

The dividend cut is reminiscent of a similar strategy that the company appears to have attempted in March 2022. In the two years prior, it had steadily increased its dividend from a low of 6% up to 10%.

Vodafone dividend yield
Created at TradingView.com

When Vodafone pumped up its dividend yield to 10% in late September 2021, the share price increased 28% over the following months. However, after cutting it down to 6% the following March, the shares began declining. Despite gradually bringing it back up to 10% over the following two years, the share price didn’t recover.

Admittedly, the price has climbed 6% since the announcement but that only barely recovers this year’s losses.

Vodafone share price
Created on TradingView.com

So what’s going well?

What has been increasing is Vodafone’s return on equity (ROE), which has risen to 18.22% in the past three years.

ROE is a good indication of how well a company is converting shareholder equity into profits. It’s calculated by dividing net income by equity (assets minus debt). As an investor, it’s reassuring to know that the business is using its assets in the most efficient manner.

Vodafone return on equity
Created on TradingView.com

And yet…

The share price has done little to reflect this performance. Vodafone’s most recent earnings were £9bn — almost half its €19.1bn market cap. With a price-to-earnings (P/E) ratio of 2.1 it’s considerably lower than the industry average of 18.1. A cash flow analysis estimates the shares to be undervalued by almost 70%.

Earnings and revenue have also decreased. In its latest Q3 results released in February, total revenue fell 4.9% while earnings-per-share (EPS) decreased 103.15%.

Vodafone revenue and EPS
Created on TradingView.com

I’ll admit – buying Vodafone shares hasn’t gone very well for me. It’s currently one of the worst-performing shares in my portfolio and cutting a dividend isn’t something typically associated with improvement.

Twelve months ago, forecasters thought the share price would be around £1.18 today. Now at only 70p, it’s far below expectations. More recent forecasts suggest growth of 37% in the next 12 months.

I wish I could share their optimism but with the price now the lowest it’s been in 27 years, I’m struggling to find the faith. I try to never sell at a loss so I’ll hold my shares for now. But if I didn’t have any, I wouldn’t be buying.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

$1bn a day! This S&P 500 share still looks like a stock market bargain after Q1 earnings

The owner of Google and YouTube just announced strong results to the stock market, including another massive $70bn share buyback.

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

3 cheap FTSE 100 stocks with big dividends to consider buying right now

Sector weakness in some FTSE 100 industries has also left some of my long-term favourite stocks offering attractive dividend yields.

Read more »

Growth Shares

Forecast: £1,000 invested in Rolls-Royce shares could be worth this much by next year

Jon Smith talks through both his opinion and analysts’ forecasts when trying to predict where Rolls-Royce shares could head from…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

£5,000 invested in Lloyds shares 5 years ago is now worth…

The price of Lloyds shares has more than doubled over the past five years. However, our writer’s cautious about the…

Read more »

Investing Articles

Up 58% in a year, the BT share price could be the FTSE 100 target to beat in 2025

The BT share price has been steadily climbing back since newish boss Allison Kirkby came on board. Is the new…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

£10,000 invested in Nvidia stock 5 years ago is now worth…

Even after the Nvidia stock falls of the past couple of months, its five-year performance remains stunning. And it could…

Read more »

artificial intelligence investing algorithms
Investing Articles

I asked ChatGPT for the best UK stocks to buy for my portfolio in the market sell-off. Here’s what it said

When Edward Sheldon asked the generative AI app for the best stocks to buy amid the market pullback, he was…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Could now be a rewarding moment to buy shares?

Christopher Ruane's looking for shares to buy in a turbulent market. But while he's focused on quality, he's equally interested…

Read more »