Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.
In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.
Today, it’s the turn of telecoms giant Vodafone (LSE: VOD) (NASDAQ:VOD.US).
Dividends past
The table below shows Vodafone’s five-year earnings and dividend record.
| 2008/9 | 2009/10 | 2010/11 | 2011/12 | 2012/13 | |
|---|---|---|---|---|---|
| Statutory earnings per share (EPS) | 5.84p | 16.44p | 15.20p | 13.74p | 0.87p |
| Underlying EPS | 17.17p | 16.11p | 16.75p | 14.91p | 15.65p |
| Ordinary dividend per share | 7.77p | 8.31p | 8.90p | 9.52p | 10.19p |
| Dividend growth | 3.5% | 6.9% | 7.1% | 7.0% | 7.0% |
As you can see, Vodafone has increased its dividend at a fairly steady rate over the last five years, aided by a specific policy of increasing the dividend by at least 7% a year for the last three. The average annual increase over the five-year period comes out at 6.3% — comfortably ahead of inflation.
Vodafone paid out a total of 44.69p a share in ordinary dividends over the five years, covered a reasonably healthy 1.8 times by ‘adjusted’ (underlying) EPS of 80.59p, but just 1.2 times by a warts-and-all statutory EPS of 126.09p. The company also paid a special dividend of 4p a share during 2011/12, out of a dividend it received as a 45% shareholder of US firm Verizon Wireless.
For the latest year (2012/13), as a result of impairment charges of £7.7bn relating to the group’s businesses in Italy and Spain, the dividend wasn’t covered by statutory EPS, but was covered 1.5 times by underlying EPS of 15.65p.
A solid dividend performance through difficult economic times, but the 7% annual increases of the later years came at the cost of falling dividend cover.
Dividends present
For the current year (ending March 2014) Vodafone introduced a new dividend policy: the board said the aim was to at least maintain the dividend at the 2012/13 level. However, everything changed in September when Vodafone announced the $130bn sale of its stake in Verizon Wireless.
When Vodafone released its half-year results last month, the board lifted the interim dividend by 8% to 3.53p a share. Management also said that after a share consolidation when the Verizon deal completes it intends to increase the final dividend by 8% resulting in a proposed total dividend of 11p for the year — “and to grow it annually thereafter”.
At a share price of 227p, Vodafone’s current-year dividend represents a yield of 4.8%.
Dividends yet to come
On the face of it, Vodafone’s new policy to grow the dividend shows an increase in management confidence since the pre-Verizon sale policy of at least maintaining the dividend.
However, there’s a good deal more uncertainty surrounding Vodafone now. Will management make successful acquisitions? Will a new organic investment programme deliver the attractive returns hoped for? Will there be a bid for the company after the Verizon deal’s gone through?
I can’t fault Vodafone for aiming to deliver annual dividend growth, but lack of visibility on how ‘new’ Vodafone will look a few years down the line when the dust has settled makes it difficult to weigh the company’s long-term prospects as a reliable income generator.
