One of the key strengths of Vodafone (LSE: VOD) (NASDAQ: VOD.US) used to be its progressive dividend policy. It’s a company pushing leading-edge telecommunications with ever-growing 4G networks being commissioned, but it’s still raking in the cash from mature markets and is to be relied on to keep handing out ever-increasing amounts of cash. Or rather, it was.
Eyes off the ball
Then we all got distracted by the Verizon Wireless sale and by frenzied takeover rumours and a lot of us took our eyes off the dividend — who’s going to offer big money for shares is all that many were interested in.
And then Vodafone dropped it’s dividend commitment. From steadily-rising dividends year-on-year, by the time 2012’s results were released in March 2013 the company only aimed “at least to maintain the ordinary dividend per share at current levels“.
Here’s what’s actually happened:
| Year (to Mar) |
Dividend | Yield | Cover | Rise |
|---|---|---|---|---|
| 2011 | 8.90p | 4.8% | 1.88x | +7.1% |
| 2012 | 9.52p | 5.3% | 1.57x | +7.0% |
| 2013 | 10.19p | 5.1% | 1.97x | +7.0% |
| 2014 | 11.00p | 5.0% | 1.59x | +7.9% |
| 2015* |
11.35p | 5.5% | 0.58x | +3.4% |
| 2016* |
11.80p | 5.7% | 0.56x | +3.6% |
* forecast
With the Vodafone share price having lost 30% to 207p since the start of 2014, the yield is once again rising strongly but for the wrong reason. And the City is expecting the annual rise to be cut — still ahead of inflation, but at less than half its previous rate.
Income falling
But what should really make us take notice here is the expected collapse of the dividend cover.
The problem is that service revenues in mature markets are falling, by 1.9% in organic terms for the year ended 31 March 2013, and by a further 4.3% a year later. Organic service revenues slumped by 9% in Europe this year, which led to a fall in earnings per share, with a massive further drop expected next year. At first-quarter time to 30 June, service revenue was down 4.2%, and the firm reported a free cash outflow after two years of falling inflows.
Outgoings rising
At the same time, Vodafone is still investing heavily in its 4G networks.
Does that sound like a company that can be relied on to keep paying dividends “at least […] at current levels“?
Vodafone’s 4G investments should hopefully pay off in the future, but for shares to go into an income portfolio I’d be looking elsewhere.
