Is the 6.9% yield on the Vodafone share price safe?

Rupert Hargreaves explains why he thinks the 6.9% yield on the Vodafone share price could be at risk, considering upcoming headwinds.

| 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.

Stack of British pound coins falling on list of share prices

Image source: Getty Images

The Vodafone (LSE: VOD) share price looks incredibly attractive as an income investment. At the time of writing, the stock supports a dividend yield of 6.9%. That is nearly double the FTSE 100 average. 

However, a market-beating dividend yield like this can signify that investors do not believe the payout is sustainable. If investors do not trust the dividend, they will sell the stock. This will push the share price lower and the yield higher. 

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

A fine line

As I noted in a previous article, Vodafone is trying to balance shareholder distributions and capital spending. This is a fine line to tread. The company has already had to reduce its dividend once in the past five years.

In the 2018/19 calendar year (Vodafone’s financial year ends in March), the group reduced its full-year per share dividend by 40%. Management needed to cut payout as earnings fell and the company was spending more on infrastructure. 

I think there is a growing chance investors could be subject to yet another cut. In the company’s financial year to the end of March, operating cash flow from operations totalled €3.1bn. From this balance, the group paid out €2.4bn in dividends to investors. 

Granted, last year was an exceptional one. Vodafone reported a net loss for the year of €1bn, due to the impact of the pandemic on its business. By comparison, for the 2020 financial year, operating cash flow totalled €5bn. 

For a company like Vodafone, which owns large amounts of costly capital equipment, looking at operating cash flow rather than net income can provide a better gauge of its financial position. That is why I like to consider operating cash flow when evaluating the sustainability of its dividend. 

Assuming the group’s operating cash flow returns to fiscal 2020 levels, its dividend does look sustainable in the near term at least.

Vodafone share price risks 

But this is without giving any consideration to the group’s enormous debt pile. In November last year, debt totalled €41bn (£34bn), up from €27bn in 2019.

Meanwhile, management has been taking action to reduce debt. The company has spun off its tower business and has been slashing costs to increase cash flow. The results of these initiatives should begin to emerge over the next year, or so.

However, the spectre of higher interest rates is looming large on the horizon. If central banks do begin to increase interest rates, the company’s interest bill could increase. And that would only make it harder for Vodafone to balance debt repayments, capital spending and shareholder returns.

Overall, Vodafone’s share price looks sustainable, based on the company’s current financials. Nevertheless, there are plenty of risks on the horizon that could present a threat to the distribution. 

With this in mind, I would not buy the stock as an income investment. I think there are plenty of other companies out there on the market, which offer a similar level of return, but with less risk for investors. 

Free Report: 3 Shares To Try And Hedge Against Inflation

The Bank Of England has acknowledged that inflation is likely to peak above 4%, and stay there until the second quarter of 2022.

Some people are running scared, but if there’s one thing we believe you should avoid doing at all costs when inflation hits… it’s doing nothing.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation.

Because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Rupert Hargreaves has no position in any of the shares 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

Buffett at the BRK AGM
Investing Articles

I’m listening to Warren Buffett about investing for the future

How does Warren Buffett incorporate an uncertain future into his investment strategy? Christopher Ruane explores what he's learnt from the…

Read more »

Worker on sofa and team on laptop screen talking and discussion in video conference and dog interruption.
Investing Articles

The Alphabet share price has fallen 25%. Time to buy?

The Alphabet share price has fallen sharply in 2022 -- and our writer scents a buying opportunity for his portfolio.

Read more »

Close-up of British bank notes
Investing Articles

How I’d invest a Stocks and Shares ISA to target yearly dividends of £1,350

Our writer reckons he could invest a £20,000 Stocks and Shares ISA to generate substantial dividend income. Here's how he…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

UK shares to buy now: how I’d invest a £1,000 lump sum

Our writer highlights some shares to buy now for his portfolio that he hopes offer both growth and income prospects.

Read more »

Investing Articles

3 top FTSE 100 shares to buy in a recession

Our writer explores three FTSE 100 shares that could protect the value of his stock market portfolio in the event…

Read more »

A Rolls-Royce employee works on an engine
Investing Articles

Could I double my money with Rolls-Royce shares?

Rolls-Royce shares have been on a downward track this year amid ongoing-pandemic related challenges. But is now a good time…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

Down 50%, are Scottish Mortgage shares a bargain growth pick?

Scottish Mortgage shares have been on a steep downward track over the past six months. Down more than half, is…

Read more »

Note paper with question mark on orange background
Investing Articles

4 reasons why I would — and wouldn’t — buy Tesco shares for June

I’m looking for the best FTSE 100 shares to buy in early June. Is Tesco a brilliant blue-chip I should…

Read more »