Vodafone’s dividend line hard to sustain
By Neil Collins
Vodafone is the income fund’s best friend. In the absence of BP dividends, Vod’s payments pumped more than any other UK company into the hands of us grateful shareholders last year.
This week the interim dividend was raised by 7.2 per cent and the target of 10.2p for the full year was repeated. The cash, along with some upbeat comments from the CEO, helped soothe the pain of some pretty bleak results.
The numbers are close to impenetrable to ordinary mortals (“loss per share”: 4.01p; “adjusted earnings per share”: 7.86p, for example). But never mind, Vod is among the most researched stocks in the world, so the analysts can guide us. Well, up to a point. The key question is whether that magnificent dividend is sustainable.
Vodafone’s most attractive asset is its 45 per cent stake in Verizon Wireless of the US. It’s going pretty well but Verizon, which owns the rest, calls the shots.
The day before Vodafone’s results, it popped out an unexpected $8.5bn Christmas dividend. That’s less than last year and there’s zero visibility about its intentions.
Ominously, Vodafone has already decided to use most of its £2.4bn share for a buyback rather than pay another special dividend; thus it will reward departing shareholders at the expense of those who remain.
The businesses Vodafone can control are mostly in various states of decline. A scary little analysis from Bernstein argues that its major competitors all have fixed-line businesses, allowing them to offer total telecom packages.
The research concludes: “Vodafone has no structural solutions for its position as a wireless-only player in an increasingly integrated European world.”
Which brings us back to that precious dividend. Bernstein calculates that free cash flow (ex-Verizon Wireless) will only just cover the proposed payout this year.
The prospects are for increased competition and more pressure on margins. It may be that Verizon decides to keep paying big dividends (it also needs the money), which will allow Vodafone to pass them on, but this is not a base on which to build a truly sustainable income stream.
In my opinion, without a regular supply of dividends from Verizon Wireless to back up Vodafone's total accounting profits, the FTSE company could have to slash its own payout.
I do not like uncertainty, and right now there is a lot of future uncertainty around Vodafone. With such a mixed earnings picture and the possibility of the dividend coming under pressure in future years, I believe now does not look to be a good time to buy Vodafone at 160 pence.