The Vodafone share price is too good to miss! Why I believe the FTSE 100 9% yielder won’t cut the dividend

Vodafone plc (LON: VOD) is a brilliant bargain, or so this Fool argues. Could the FTSE 100 (INDEXFTSE: UKX) stock’s share price be about to soar?

| 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.

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.

Investors don’t like Vodafone Group (LSE: VOD) at the moment. Its share price was under severe pressure prior to October’s broad-based equity sell-off and now it can be found trading at levels not seen for the best part of a decade.

Total losses in the year to date stand around the 40% marker. This provides the opportunity for FTSE 100 investors to pick up a bona fide bargain, in my opinion.

Dividend cut? What dividend cut?!

The main cause for the frantic selling of Vodafone’s shares has been the escalation of concerns over the level of future dividends.

The company’s multibillion-pound ‘Project Spring’ organic investment scheme may be a thing of the past, but the cost of maintaining its network and improving its services still remains colossal. In particular, the purchase of Liberty Global’s assets in Central and Eastern Europe and the impact of expensive 5G mobile spectrum auctions is causing many to suggest that a dividend cut is in the offing.

City brokers don’t think that such a scenario is on the cards though. Sure, they are predicting that Vodafone’s progressive dividend policy will fall as they predict a double-digit earnings drop for the year to March 2019. However, the boffins remain convinced that the firm has the financial strength to keep the payout locked at 15.07 euro cents per share, a figure that yields a mammoth 9.4%.

Yield moves to almost 10%

And it’s not difficult to see why the experts remain seduced by Vodafone’s dividend picture. The company is, simply put, a cash-generating colossus, as illustrated by July’s trading update in which it advised that free cash flow (excluding the likely costs associated with spectrum) should be “at least” €5.2bn in the current year.

This would reflect a drop from fiscal 2018’s corresponding reading of €5.4bn, but is still a reassuringly robust figure, and particularly so given the prospect of a hefty earnings drop.

Right now, in fact, the number crunchers are expecting payouts at Vodafone to rise before they fall. Helped by an anticipated 14% profits rise next year they are projecting an improved reward of 15.5 euro cents, a number that drives the yield to a staggering 9.7%.

Outstanding value

It’s always been an expensive selection but right now Vodafone no longer commands a premium valuation. And sooner or later I believe that this will lead to a flurry of buying from value hunters.

Right now it carries a forward P/E ratio of 15.8 times, just a smidgen above the accepted value territory of around 15 times (and below). That’s low at the best of times, but scandalously cheap given the telecoms titan’s brilliant long-term earnings opportunities in Europe and in emerging markets alike.

Vodafone is all set to declare half-year results in the next few weeks. Should it elect to at least keep the interim dividend on hold from the previous year, as I of course fully expect it to, then its share price could really fly. Consequently I think now is a shrewd time to buy into the communications giant.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »