While the FTSE 100 as a whole fared better than most indices in the 2022 stock market correction, many of its constituents weren’t so fortunate. And some businesses, even those believed to be stalwarts, have suffered double-digit declines, sending dividend yields through the roof.
This seems to perfectly describe the current state of Vodafone (LSE:VOD) right now. The telecommunications giant has seen its share price slashed by nearly 30% over the last 12 months. And consequently, its yield now stands at an impressive 8.7%!
Provided that this decline in valuation isn’t being caused by something that compromises its cash flows, investors could be looking at an incredible income opportunity. So, is this a stock worth adding to a Stocks and Shares ISA before the 5 April deadline? Let’s take a closer look.
Investigating Vodafone’s dividend yield
Before jumping into a seemingly cheap income investment, it’s essential to verify that it’s actually a bargain rather than a falling knife.
Despite what the decline in valuation suggests, Vodafone’s UK operations are chugging along nicely. Between April and September 2022, the company added an additional 76,000 contract customers pushing its Mobile service revenue up by 10.5%. A trend has continued into the third quarter, with churn rates remaining relatively stable at 12.7%.
Meanwhile, its African mobile payments network, M-Pesa, continues to take market share. Payment volumes have increased by a further 14% bringing its total revenue contribution to Vodafone’s services income channel to 25.7%. And this level of double-digit performance seems to have spread to other international markets like Turkey, Egypt, and Ghana.
Needless to say, this is all rather positive. And on the surface suggests that Vodafone’s cash flows are set to support its 8.7% yield. So, why has the share price tumbled on the back of seemingly solid results?
A brewing problem
Despite the strong success in many of its target markets, trouble seems to be brewing in Germany. Following a recent change in regulation has made it easier for consumers to exit their broadband contracts resulting in an exodus of 83,000 customers.
This is particularly problematic since Germany is Vodafone’s highest-margin market. Pairing this with rising costs courtesy of inflation and profit margins have started getting squeezed. All this culminated in a free cash outflow of €3.2bn and a downgrade in the group’s near-term outlook.
CEO Rick Read has now stepped down after four years on the job. And a replacement CEO has yet to be appointed, with CFO Margherita Della Valle acting as the group’s interim leader.
The future of Vodafone’s dividend yield remains unclear. A new cost-saving initiative has been launched to try and reduce annual expenses by €1bn. Meanwhile, a new joint venture with Altice in Germany is attempting to bring broadband to over seven million homes.
If these new strategies are successful, the group may be capable of sustaining its current 8.7% shareholder payout. But its track record is pretty sketchy, with the share price in a firm downward trend since 2017. Therefore, personally, I’m not in any hurry to add Vodafone shares to my income portfolio today.
