Does the mobile giant's dividend pass the test?
In the dividend report card series, we analyse financial metrics to begin answering the following questions about a company's dividend:
1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?
For a full explanation of each category, click here for a tutorial.
Today's pupil is Vodafone (LSE: VOD) which has a prospective 5.9% yield, according to Company REFS.
Dividend history
Source: Capital IQ, as of August 24, 2010.
This is precisely what you want to see: a 1:1 ratio for the long-term dividend and earnings growth rates. Vodafone is also a member of the Mergent Dividend Achievers Index, which means it has raised its dividend for at least five consecutive years. It's of little surprise, then, that it scores a 5 of 5 in this category.
Sustainability
| Metric | Trailing
12 Months | Final Grade
Weighting | Report Card
Score
(out of 5) |
|---|
| Interest cover | 4.5 times | 10% | 4 |
| EPS payout ratio | 47.9% | 10% | 5 |
| FCFE payout ratio | 53% | 30% | 4 |
Source: Capital IQ, as of August 24, 2010.
With £4.4 billion in cash to cover its £4.1 billion annual dividend payout and a sufficient amount of operating profits to pay its creditors, Vodafone's balance sheet is good, though not stellar.
In fact, the company's long-term debt load has more than doubled since fiscal year 2005; fortunately, interest expenses are only up 50%, implying that Vodafone's been able to secure cheaper financing in recent years.
The dividend is well covered by profits and free cash flow, so the current dividend level appears sustainable.
Growth
| Metric | Trailing
12 Months | Final Grade
Weighting | Report Card
Score
(out of 5) |
|---|
| EPS payout ratio | 47.9% | 10% | 4 |
| FCFE payout ratio | 53% | 20% | 3 |
| Sustainable growth rate | 5.1% | 10% | 2 |
Vodafone has a dividend growth target of 7% per annum through fiscal year 2013, which is quite encouraging.
One of the reasons that Vodafone should feel comfortable with this target is it should begin receiving its own dividends from its 45% stake in the Verizon Wireless -- via a partnership with US telecom giant, Verizon. The partnership hasn't paid a dividend since 2005 (the cash has been used to pay down debt, etc.), but is expected to resume payments in 2012.
This could significantly increase Vodafone's free cash flow and thus its ability to fuel dividend growth.
Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against its direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.
| Company | Dividend
Yield* |
|---|
| BT Group (LSE: BT-A) | 5.1% |
| Verizon (US) | 6.5% |
| AT&T (US) | 6.4% |
* All trailing yields
Vodafone's 5.9% expected yield (5.5% trailing) puts it square in the middle of these major US and UK-based peers. As such, it shouldn't feel too much external or internal pressure to raise or lower its dividend to keep up with competitors.
Pencils down!
With all the numbers in, here's how Vodafone's dividend scored:
| Weighting | Category | Final Grade |
|---|
| 10% | History | 5 |
| | Sustainability | |
| 10% | Interest Cover | 4 |
| 10% | EPS Payout Ratio | 5 |
| 30% | FCFE Payout Ratio | 4 |
| | Growth | |
| 10% | EPS Payout Ratio | 4 |
| 20% | FCFE Payout Ratio | 3 |
| 10% | Sustainable growth | 2 |
| 100% | Total Score (Out of 5) | 3.8 |
| | Final Grade | B |
Vodafone is a very solid high yield share, though long-term dividend growth will be modest. With the Verizon Wireless partnership set to begin feeding cash to Vodafone in the coming years, it remains one to consider adding or holding in an income-based portfolio.
Read more dividend report cards:
> Todd does not own shares of any company mentioned.
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