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Don't Buy Vodafone Group Plc (LON:VOD) For Its Next Dividend Without Doing These Checks

Simply Wall St

Vodafone Group Plc (LON:VOD) is about to trade ex-dividend in the next 2 days. You will need to purchase shares before the 28th of November to receive the dividend, which will be paid on the 7th of February.

Vodafone Group's next dividend payment will be UK£0.045 per share, and in the last 12 months, the company paid a total of UK£0.087 per share. Looking at the last 12 months of distributions, Vodafone Group has a trailing yield of approximately 4.8% on its current stock price of £1.5658. If you buy this business for its dividend, you should have an idea of whether Vodafone Group's dividend is reliable and sustainable. So we need to investigate whether Vodafone Group can afford its dividend, and if the dividend could grow.

View our latest analysis for Vodafone Group

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Vodafone Group lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It distributed 37% of its free cash flow as dividends, a comfortable payout level for most companies.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

LSE:VOD Historical Dividend Yield, November 25th 2019

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Vodafone Group reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

We'd also point out that Vodafone Group issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Vodafone Group's dividend payments per share have declined at 5.5% per year on average over the past ten years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

We update our analysis on Vodafone Group every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Should investors buy Vodafone Group for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

Curious what other investors think of Vodafone Group? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.