Today I am looking at whether Vodafone (LSE: VOD) (NASDAQ: VOD.US) is an appealing pick for those seeking chunky dividend income.
A consistent dividend deliverer
A backcloth of enduring revenues pressure across Europe has caused Vodafone’s earnings performance to shake wildly in recent years. The company has seen earnings decline twice in the past five years, and City analysts expect the telecoms giant to punch a further 8% decline for the 12 months concluding March 2014, results for which are due on Tuesday, May 20.
Despite these travails, the company has still kept dividends ticking higher at a considerable pace, the full-year payout having risen
at an inflation-beating compound annual growth rate of 7% since 2008. And current forecasts point to a further 9% rise in fiscal 2014, to 11.1p per share.
However, analysts expect the company to punch a colossal 35% earnings drop during 2015, a situation expected to put the brakes on dividend growth — indeed, the full-year dividend is predicted to register at 11.3p per share, up just 1.8% from 2014 levels.
Still, dividends for 2014 and 2015 still create monster yields of 5% and 5.1% respectively, far ahead of the 3.2% FTSE 100 prospective average and smashing a corresponding reading of 4.5% for the complete mobile telecommunications sector.
Cash is king
At face value, investors should be concerned that consistent earnings pressure is anticipated to heavily erode Vodafone’s already-flimsy dividend coverage. Indeed, a reading of 1.3 times forward earnings for 2014 — well below the widely regarded security watermark of 2 times — slips to 0.8 times this year, as the dividend is expected to outstrip earnings of 9.4p per share.
However, I for one am not worried by these readings due to the huge sums of cash the company continues to throw up. The business noted in February’s financial update that it remains on course to punch free cash flow of between £4.5bn and £5bn in 2014, albeit down from £5.6bn last year.
This lesser figure is anticipated due to the vast capital expenditure laid out in recent times in key growth areas. In March the firm bulked up its exposure to developing markets by paying £1bn to acquire the whole of Vodafone India, and also confirmed the £6bn purchase of Spanish cable operator Ono which builds its presence in the multi-services entertainment sector in Europe.
Although an environment of service revenues difficulties remains a worry, I believe that the firm’s bubbly acquisition drive — added to its £7bn Project Spring organic investment scheme — should help it to turn around its ailing fortunes on the continent and build its stature in hot growth areas. With this in mind I reckon that Vodafone is an excellent long-term pick for both growth and income investors.
