This FTSE 100 stock certainly seems like something to phone home about. After all, it offers a dividend yield that’s more than double the 4.1% the index paid in 2022. That’s enticing enough for me to consider the merits of adding the shares to my portfolio.
The company in question is Vodafone (LSE:VOD). Its stock price has collapsed by 33% over the last year, sending its dividend yield shooting higher than an overhead wire.
Should I be loading up on Vodafone shares at this price? Or has Mr Market been punishing the telecommunications giant for good reason?
Lethargic growth forecasts
Vodafone is certainly not a high-growth prospect. Analysts estimate the company’s revenue will grow at a sluggish 0.5% per year. That’s based on a line drawn through 19 forecasters’ guesses about Vodafone’s earnings trajectory, compiled by software company Simply Wall Street.
Worryingly, that leaves Vodafone trailing the UK market, which is forecast to see revenue growth of 4.3% a year.
Meanwhile, the European wireless telecoms sector is projected to grow revenue by 1.7% a year. That means the percentage of the telecoms pie in Vodafone’s hands is forecast to decline over the coming years.
Vodafone’s FY23 Q3 trading update showed a slowdown in revenue growth. In Q2, group revenue had grown year on year by 2.5%. In Q3 it was down to 1.8%. Even that 1.8% figure was too generous: it included a 52.9% revenue rise in inflation-ravaged Turkey. With the Turkish anomaly excluded, revenue grew by only 0.5% in Q3.
The company explained that its poor growth was due in part to the EU Telecommunications Act. From 1 July 2022, regulations out of Brussels stopped Vodafone from being able to charge travellers in the EU and the EEA extra charges for calls, texts, and internet use outside of their home countries. The ‘roam-like-at-home’ scheme will remain in effect until 2032. Vodafone saw Q3 revenue growth in Europe contract by 1.1% compared with the previous year partly on the back of this change.
On the bright side, Q3 growth remained respectable in Africa at 3.5%, driven by higher data usage and good demand for financial services.
Hold the line
Of course, if I’m looking for a high-dividend stock, I normally have to temper my expectations for wild growth. Dividend aristocrats, for instance, tend to be slow-and-steady movers.
But I think Vodafone falls short even as an income stock. Its dividend payout has fallen over the last 10 years. To take a single data point, in 2012 shareholders got 18p per share, but by 2022 that had fallen to 8p.
In other words, the increase in the dividend yield has been driven solely by a steady downward march of its share price. This isn’t a story of rising dividend payouts.
And dividends could be cut again in the future. The payout ratio is an unsustainable 123%, meaning its earnings don’t stretch far enough to make the payments. At the same time, Vodafone’s debt-to-equity ratio has rocketed from 63.4% to 114% over the last five years.
I won’t be adding Vodafone shares to my portfolio, despite the impressive telecommunications infrastructure it owns across 21 countries. The dividend payout looks unsustainable to me, and the firm’s weak growth and growing debt burden set alarm bells ringing in my head.
