How Safe Is Your Money In Vodafone Group plc?

Could Vodafone Group plc (LON:VOD) cope with a run of bad luck without cutting its dividend?

| 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.


Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) has recently undergone a massive transformation, selling its 45% stake in US mobile operator Verizon Wireless for $130bn to Verizon Communications.

As a Vodafone shareholder, I’m keen to understand more about what’s left of Vodafone,  and to see how strong its dividend might be if revenues from the firm’s main European markets continue to decline.

I’ve chosen three financial ratios commonly used by credit rating agencies to help me gauge the strength of Vodafone’s finances — and its dividend.

1. Operating profit/interest

Ratings agencies normally use Earnings Before Interest and Tax (EBIT), instead of operating profit, but the two are normally very similar, and operating profit is easier for us to find, as it’s always included in company results.

What we’re looking for here is a ratio of at least 1.5, to show that Vodafone’s earnings cover its interest payments with room to spare:

£10,139m / £1,637m = 6.2 times cover

Interest cover of 6.2 times should mean that Vodafone can comfortably maintain its dividend payment, even if earnings from its core European businesses continue to fall.

2. Debt/equity ratio

Commonly referred to as gearing, this is simply the ratio of debt to shareholder equity, or book value (total assets – total liabilities). I tend to use net debt, as companies often maintain large cash balances that can be used to reduce debt if necessary.

Acceptable levels of gearing vary, but as a rule of thumb, less than 50% is pretty safe, while more than 100% is a definite risk. Between 50% and 100% is a grey area, where other factors, such as profitability and growth, need to be considered.

Vodafone repaid $5.65bn of debt following the Verizon Wireless transaction, giving it net debts of approximately $23bn. Vodafone’s most recent reported equity is $84bn, giving net gearing of 28%.

These figures will change when Vodafone publishes its first set of figures after the Verizon Wireless sale, but I’m fairly sure that this will cause Vodafone’s gearing to fall further, as the firm retained approximately $35bn of the $130bn it received from Verizon Wireless, in order to fund acquisitions, debt reduction and capex.

3. Operating profit/sales

This ratio is usually known as operating margin, and is useful measure of a company’s profitability.

Vodafone’s 22% operating margin is very healthy, and again suggests that the firm should comfortably be able to maintain its dividend.

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.

> Roland owns shares in Vodafone but not in any of the other companies mentioned in this article.

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »