Vodafone (LSE: VOD) (NASDAQ: VOD.US) is one of the FTSE 100‘s dividend stalwarts. Indeed, the company currently supports a dividend yield of 5.4%, significantly above the FTSE 100’s dividend yield of 3.6%.
However, as Vodafone struggles to grow, the company’s dividend payout is coming under pressure and I believe that a 50% dividend cut could be on the cards.
Lack of growth
It’s no secret that Vodafone is struggling to grow. The economic climate within the company’s key European market continues to impact sales and Vodafone is investing billions to try and snatch customers back from peers.
Nevertheless, it’s going to be some time before Vodafone’s infrastructure investments start to pay off and until they do, Vodafone’s management is going to have to work hard to balance the books. With this in mind, it appears as if Vodafone’s dividend is under threat, as the company is currently paying out more than it can afford to investors.
Unsustainable dividend
Take a quick look at the numbers City analysts have pencilled in for Vodafone between now and 2016, and it’s easy to see that the company cannot cover its dividend payout. Specifically, analysts are expecting Vodafone to report earnings per share of 6.6p for the year ending March 2015, although the company is expected to pay a dividend of 11.3p per share.
What’s more, figures for 2016 are similar. Analysts expect Vodafone to report earnings per share of 6.8p for the year ending March 2016, while paying out a dividend of 11.7p per share.
Unfortunately, Vodafone’s dividend payout cannot exceed earnings per share indefinitely and at some point, management will have to make the tough decision to slash the payout. But a dividend cut could be good news for investors.
Not all bad news
A dividend cut would not be the end of the world for Vodafone’s investors. Indeed, if the company were to slash the payout, Vodafone would have more cash available to pay down debt. Additionally, the company would be able to fund additional acquisitions, which would boost earnings growth.
Actually, a dividend cut could be the answer to Vodafone’s problems. With just over 26.4bn shares in issue, according to my calculations, this year’s dividend of 11.3p will cost the company approximately £3bn.
Cutting the payout by 50% could save £1.5bn per annum, enough to snap up several smaller peers and drive growth through bolt-on acquisitions. An additional £1.5bn in cash per year would also help Vodafone pay down its debt pile of £14.1bn, as reported at the end of June.
Long-term horizon
Still, even after a dividend cut, Vodafone’s defensive nature makes the company’s shares a great long-term investment. It’s also likely that the company’s dividend will rise back to previous levels over time.
