For a long while, the Vodafone Group (LSE: VOD) share price looked too high to me and I thought the company was over-valued. However, since January 2018, the telecoms stock has plunged around 40% and the dividend yield has bubbled up to more than 8%.
Are you hunting for attractive, sustainable dividends from big companies like Vodafone? Read on and I’ll dig a little deeper to gauge whether the firm can keep up its dividend payments in the years ahead.
Targeting a simpler operating model
In January’s trading update, chief executive Nick Read said the firm saw lower mobile contract churn in all its markets and improved customer trends in Italy and Spain during the last three months of 2018. But the financial results had yet to show up the trend. There was “good growth” in the firm’s emerging-markets businesses, but in South Africa, the outcome was less buoyant, affected by price reductions and “a challenging macroeconomic environment.”
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Read explained that Vodafone is implementing a “radically simpler” operating model aimed at accelerating its “digital transformation.” Organisational changes have been announced in Spain and the UK, and the company is looking at partnering deals “to improve asset utilisation.” Indeed, since February, the company has released several partnering announcements, which may be the beginning of a trend that could help to deliver better earnings down the line.
Uninspiring trading
I reckon it takes good incoming cash flow to support dividend payments. Let’s look at the recent record on cash flow and compare it to the company’s net debt figures because the interest on debt competes with the dividend for the cash.
|
Year to March |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Operating cash flow per share (€) |
0.48 |
0.54 |
0.51 |
0.49 |
0.45 |
|
Net debt (€m) |
33,648 |
33,319 |
26,682 |
26,509 |
30,241 |
During the past five years, cash flow and the net debt figure have been stable, but it would take moderately rising cash flow each year to support an advancing dividend. And Vodafone’s dividend has, indeed, been flat over the period:
|
Year to March |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Dividend per share (€) |
0.15 |
0.14 |
0.15 |
0.15 |
0.15 |
|
Adjusted earnings per share (€) |
0.29 |
(0.18) |
(0.098) |
0.16 |
0.09 |
Adjusted earnings have been erratic and have failed to cover the dividend payment for three of the five years in the table. Looking forward, City analysts following the firm expect earnings to increase by a double-digit percentage during the year to March 2020 but even after that, they’d fail to fully cover the dividend.
I like my dividend-backed investments to be supported by a business capable of increasing earnings, cash flow and the dividend a little each year and Vodafone fails that fundamental test. On top of that, the share price seems to be locked in a downtrend. It’s all about what the company will do in the future, and one possibility is that the fat dividend could receive a haircut! So, I’m staying away from the shares and consider the firm’s dividend to be unsafe at its present level.
