When will Vodafone Group plc be able to afford its dividend?

Is Vodafone Group plc (LON:VOD)’s dividend sustainable?

| 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.

Shareholders of Vodafone (LSE: VOD) were cheered by the company’s annual results this week, with the board lifting the dividend by 2% to 11.45p a share. The dividend is a big draw for investors, with a 5% yield on offer at a current share price of 228p. But can Vodafone afford it?

Cash flow is the lifeblood of dividends

On the face of it, things don’t look good. Earnings per share came in at just 5.04p, and won’t get close to covering the dividend any year soon. However, accounting earnings are one thing, but it’s cash flows that are the lifeblood of dividends. With Vodafone’s huge Project Spring investment programme now completed, how are cash flows shaping up?

The table below shows some select numbers that I’ll refer to in examining Vodafone’s cash flow and dividend prospects.

Financial year Capex (£bn) Free Cash
Flow (£bn)
Licence & spectrum
costs (£bn)
Restructuring
costs (£bn)
FCF after
licence & spectrum and
restructuring costs (£bn)
Ordinary
dividends (£bn)
2012/13 5.3 5.7 2.5 0.3 2.9 4.8
2013/14 6.3 4.4 0.9 0.2 3.3 5.1
2014/15 9.2 1.1 0.4 0.3 0.4 2.9
2015/16 8.6 1.0 2.9 0.2 (2.1) 3.0
2016/17 6.8 (est.) >3.2 1.5 (av.) 0.25 (av.) >1.4 3.1 (est.)

The elevated capital expenditure in 2014/15 (£9.2bn) and 2015/16 (£8.6bn) reflects Vodafone’s Project Spring investment programme. Taken in isolation these numbers appear huge, but when we look at other years, we can see that Project Spring pretty much represents three years of normal capex squeezed into two. Massive annual investment is simply a fact of life in Vodafone’s industry.

Based on statements by the company, I calculate capex normalising to £6.8bn in 2016/17 — £1.8bn lower than the year just gone. This will help free cash flow (FCF) rise from £1bn to Vodafone’s explicit guidance of ‘at least’ £3.2bn. As you can see, this would cover the ordinary dividend payout, which I estimate will be £3.1bn — the first time FCF will have covered the dividend since 2012/13.

However, the FCF figure Vodafone gives is before M&A activity, licence & spectrum costs and restructuring costs. While M&A activity is certainly discretionary, I prefer to treat licence & spectrum and restructuring costs as annually recurring and necessary expenses. On this basis, FCF hasn’t covered the dividend in any of the last four years and won’t cover it in 2016/17, assuming the annual average of combined licence & spectrum and restructuring costs of £1.75bn.

A much more encouraging picture

If Vodafone’s guidance and my estimates are near the mark, Vodafone won’t be quite at the point this year where FCF (after licence & spectrum and restructuring costs) covers the dividend. However, with operating cash flows set to rise as the Project Spring investment comes through over the next few years, and £10.2bn of cash on the balance sheet for M&A activity, it’s not hard to see Vodafone moving quite rapidly to a position where the level of FCF means the company can ‘afford’ the dividend.

In summary, then, the cash-flow outlook paints a much more encouraging picture for the sustainability of Vodafone’s dividend than that presented by earnings forecasts. As such, I would say that the company’s 5% dividend yield appears attractive.

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.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »