The Motley Fool

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

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

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.