The Vodafone share price slumps 30%, but is it time to load up?

Is Vodafone Group plc (LON: VOD) a falling knife worth trying to catch on the way down?

| 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.

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.

Over the past 12 months, the Vodafone (LSE: VOD) share price has slumped. Holders have seen the value of their investment fall by nearly 30% excluding dividends over this period. Including payments to shareholders, the stock has returned -22.3%, which is marginally better, but still a double-digit underperformance vs. the FTSE 100 over the same period.

And it looks as if the stock’s weakness can be traced back to one factor, the sustainability of Vodafone’s dividend.

Losing support

Shares in Vodafone have always traded on the company’s dividend. Because its earnings tend to fluctuate wildly due to spectrum auction payments and capital spending obligations, the firm’s annual dividend payment has proved itself to be a more reliable indicator of value. 

For example, over the past few years, the dividend yield has averaged between 7% and 5% while the company’s reported earnings per share (EPS) figure has bounced around between -€0.20 and €0.50. Over the same period, the annual dividend has held steady at approximately €0.15 per share. 

However, after sliding 30% over the past 12 months, the stock now supports a dividend yield of 8.6% — more than twice the market average.

This view seems to reflect the City’s opinion that Vodafone will have to cut its dividend at some point in the next few years. Going down this path might disappoint income investors, but it would free up resources to pay down debt and invest in what one group of analysts calls, “projects that might enhance earnings growth organically.

Time to cut the payout? 

The catalyst that has ignited dividend cut chatter is Vodafone’s deal with Liberty Global

It is paying a total of €19bn for Liberty Global’s cable networks in Germany and eastern Europe. This deal, the largest Vodafone has committed itself to since 2000, will boost EPS although group debt will spike. And this is what analysts are worried about. They estimate that after the deal, Vodafone’s debt will be 3.3x operating cash flow (excluding capital spending and dividend payments). The City believes that if the company does not cut its dividend, debt will remain at this level for years, limiting the group’s ability to invest in new projects. If Vodafone isn’t investing in new tech like 5G, customers might start walking away.

Personally, a cut might be the best course of action. It might be bad for income seekers in the short term, but I reckon the reduction would put the business on a stable long-term footing. 


Considering all of the above, I’m cautiously optimistic about the outlook for the company. If the dividend is reduced, the stock could fall further from current levels. If not, rumours could haunt the business for some time, which would cap further gains. The good news is, right now, after recent declines, even if the annual payout were cut by 50% to €0.07, Vodafone would still support a market-beating dividend yield of 3.9%. 

So, if it is income you’re after, whatever course of action the company decides on, Vodafone will remain one of the FTSE 100’s best income stocks.

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British bank notes and coins
Investing Articles

Should I buy M&G shares for the 9.8% dividend yield?

With the M&G dividend yield close to double digits, this existing shareholder explains why he'd happily buy more of the…

Read more »

British Isles on nautical map
Investing Articles

This cheap UK stock could rise 30%, the City says

Analysts covering Serco Group shares reckon they could rise by over a quarter. But is this UK stock a good…

Read more »

2024 year number handwritten on a sandy beach at sunrise
Investing Articles

Here’s how I’d aim for a million by investing £45 a day

Christopher Ruane thinks putting £45 a day into blue-chip shares could help him aim for a million. Here are some…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

I’d buy FTSE 100 shares in December before the next stock market rally!

Christopher Ruane explains why he would happily snap up cheap FTSE 100 shares between now and the end of the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

6% yield and 8% annual revenue growth! A passive income opportunity

Why not have the best of both worlds? Our writer explores a passive income opportunity with a 6% yield, bolstered…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’ve been loading up on this FTSE 250 share in November!

Christopher Ruane explains why he's been adding even more shares in this well-known FTSE 250 name to his portfolio this…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Down 30%, these cheap shares are on sale!

Cheap shares don’t mean anything to our analyst unless there’s real value in what he’s buying. Let’s see his Foolish…

Read more »

Photo of a man going through financial problems
Investing Articles

I can’t believe how far these FTSE 100 shares have fallen!

While the FTSE 100 is up 0.7% over six months, these five Footsie flops have collapsed 26% to 40%. But…

Read more »