As Vodafone returns to underlying growth, is the 6% dividend yield safer?

Here’s why I think the asset strategy and better earnings improved the outlook for Vodafone’s ongoing shareholder dividend payments a little today.

| 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.

sdf

FTSE 100 telecoms giant Vodafone (LSE: VOD) released its third-quarter trading update today. The company declared the business has returned to service revenue growth of 0.4% year on year. That beats a decline of 0.4% suffered in the second quarter.

The report hails this outcome as a “resilient” trading performance driven by “continued commercial momentum,” despite ongoing lockdowns.

However, service revenue is an alternative measure designed to highlight the underlying growth in the business. And overall, total revenue declined by 0.3% in the period.

Vodafone shares are up today

The share price looks buoyant today. And at just above 131p, the dividend yield is near 6%. But the directors rebased the shareholder payment lower in 2019, which isn’t an ideal scenario for income-seeking investors. On top of that, Vodafone’s shares trade more than 40% below their level three years ago. So shareholders have suffered declining income and capital losses over the period.

One of Vodafone’s attractions is its vast infrastructure network. Competitors can’t replicate the set-up easily. But maintaining and developing the infrastructure requires vast sums of capital investment. And Vodafone must invest constantly to maintain the competitive advantage of the business.

One consequence is the big debt-load carried by the firm. And the servicing of debt interest tends to compete with the servicing of shareholder dividend payments. However, the company is reducing its ongoing costs by sharing its networks with other firms for a fee. And there’s also a strategy of investing in infrastructure via joint ventures.

A positive outlook

Chief executive Nick Read said in today’s report the recent good trading makes him “confident” in the full-year outlook. The company expects adjusted EBITDA to be between €14.4bn and €14.6bn and free cash flow to be “at least” €5bn. That anticipated cash flow performance is consistent with the five-year record. And it confirms that steady flows of incoming cash is one of Vodafone’s big strengths.

Read also mentioned the upcoming Initial Public Offering (IPO) of Vantage Towers (Vodafone’s radio tower business) in early 2021. The flotation is set to raise money for Vodafone. And Read said it will now include the firm’s 50% shareholding in its UK towers joint venture with Telefonica.

Meanwhile, City analysts following Vodafone expect overall earnings to increase by just over 30% for the trading year to March 2022. That will raise the cover for the anticipated dividend to just over one. I like to see higher cover from earnings. But, in the case of Vodafone, free cash flow has historically covered the shareholder payment well. Nevertheless, cover from free cash didn’t prevent the recent cut in the dividend.

On balance, I think the outlook for ongoing shareholder dividend payments improved a little today. But Vodafone isn’t the only high-yielding investment I’d consider in the FTSE 100 right now. For example, I’d also run the calculator over companies such as GlaxoSmithKline, British American Tobacco and National Grid.

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.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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

Santa Clara offices of NVIDIA
Investing Articles

The Nvidia share price hit an all-time high this week. But could it still be a bargain?

The Nvidia share price has soared 1,466% in just five years. This writer reckons the best may yet be to…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

How much does someone need to invest to target a second income of £15k – or £150k?

A second income from dividend shares? It's a well-worn path -- and this writer sees some attractions to the approach.…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Could the stock market crash in the second half of 2025?

As the FTSE 100 hits a new high, could a stock market crash be coming? Our writer thinks there's a…

Read more »

Man hanging in the balance over a log at seaside in Scotland
Investing Articles

Start investing this summer with a spare £250? Here’s how!

Christopher Ruane explains how an investor with a few hundred pounds to spare and no prior experience could look to…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Is Palantir stock the new Nvidia? Why UK investors should (or shouldn’t) care

Palantir stock’s the top performer on the S&P 500 this year. Should UK investors consider it amid a blistering AI-fuelled…

Read more »

Investing Articles

3 FTSE 100 shares I think look undervalued

The FTSE 100 may be hitting record highs but there are still bargains to be had on the index. I…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£20,000 in savings? Here’s how to target £841 of passive income each month

Passive income plans don't need to be complicated. Our writer explains how someone could target a sizeable second income buying…

Read more »

Happy couple showing relief at news
Investing Articles

3 passive income strategies I like to try to double the State Pension with just £100 a month

Investing consistently, with diligence, and patience can lead to an impressive stock market income that puts the State Pension to…

Read more »