8.5% yield! Here’s the Vodafone dividend forecast for the next two years

FTSE 100 firm Vodafone has its fair share of problems. But should I buy the embattled business for its exceptional dividend forecasts?

| 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.

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

Image source: Getty Images

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.

The Vodafone Group (LSE:VOD) share price has slumped by almost a third during the past year. It’s a descent that leaves the telecoms firm carrying huge dividend yields based on current forecasts.

For the year to March 2024, Vodafone shares boast a huge 8.5 yield. This is far ahead of the 3.7% average for FTSE 100 shares.

But how realistic are current dividend forecasts? And should I buy the battered stock for my portfolio today?

Dividends to drop?

Vodafone shares have been a reliable source of passive income for years. Its impressive cash generation and defensive operations mean it has paid a full-year dividend of 9 euro cents per share for the past half a decade.

However, tough conditions in its core markets mean Vodafone is tipped to reduce the annual payout from this year. A total dividend of 8 euro cents is predicted for financial 2024 and 2025.

Mixed picture

The good news is that current dividend forecasts still produce those massive yields. The bad news is that payouts aren’t well covered by anticipated earnings.

Expected dividends for this year are actually outstripped by predicted earnings. And they are covered just 1.1 times by anticipated earnings next year. Dividend cover below 2 times doesn’t leave a wide margin of safety for investors in the event of earnings disappointment.

Having said that, Vodafone has long offered poor dividend cover. And this hasn’t affected its ability to pay market-beating rewards.

It’s also important to note that the company remains a formidable cash generator. This could give it the means to meet those dividend forecasts even if profits underwhelm. Adjusted free cash flow dropped last year but still stood at a robust €4.8bn as of March.

Elsewhere, net debt dropped 20% year on year to €33.4bn. And so the company’s net-debt-to-adjusted EBITDAaL (or earnings before interest, tax, depreciation and amortisation after leases) fell to 2.5 times.

A reading of 3 times should give investors reasons to be fearful. So Vodafone passes this test.

Decision time

So what should I do now? Well, intense market competition and country-specific trading challenges pose a considerable risk to Vodafone and its investors. The scale of these pressures were laid bare by full-year financials this week.

The FTSE firm’s service revenues rose just 2.2% due to troubles in its European markets. More specifically, comparable sales slumped 1.6% in its critical German marketplace. This reflected legislative changes banning automatic contract renewals, resulting in a slump in broadband and TV customers.

As a result, adjusted pre-tax profit at Vodafone dropped 9% last year, to €4.7bn.

The verdict

But despite these travails I’m thinking of buying its shares for my portfolio. I believe Vodafone’s problems are baked into its reasonable price-to-earnings (P/E) ratio of around 16 times. Then there’s that huge dividend yield.

Okay, those dividend forecasts aren’t as robust as I’d like. However, I’m confident the telecoms titan has the financial strength to meet what City analysts are expecting.

And this week the company announced massive streamlining to turn around its fortunes. It plans to remove 11,000 jobs through to 2026. It will also focus on in its business division to drive revenues.

Buying any UK share involves balancing risk with potential reward. And all things considered, I believe Vodafone shares are an attractive buy.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. 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

Middle-aged black male working at home desk
Investing Articles

Are these top-traded FTSE 100 shares the best to buy for 2024?

The market has disagreed with me pretty much all year on the best buys among FTSE 100 shares. But, are…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

My five favourite forms of passive income

I've been looking for ways to pump up my passive income, so I can retire richer. But which of these…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

What’s the FTSE 100’s best 10% dividend yield?

Depressed prices have thrown up some golden opportunities on the FTSE 100. Which of these 10%-yielding Footsie stocks should I…

Read more »

Two white male workmen working on site at an oil rig
Investing Articles

BP shares look dirt cheap

Are BP shares a brilliant bargain? The financials look excellent and it’s hard not to call them anything other than…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Investing Articles

My 12 fears for the stock market in 2024

After a terrific year for global stock markets in 2023, what can I look forward to in 2024? As a…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 income shares for bumper dividends in 2024

I own these two income shares for their outstanding ability to deliver billions of pounds of cash dividends each year…

Read more »

Investing Articles

Could the IAG share price hit £2.11 in 2024?

According to analysts, the IAG share price could be headed for £2.11. But Stephen Wright wonders whether the stock is…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

1 hot UK growth stock I’m buying right now

I've more than doubled my money on this UK growth stock. But with a 948% boost to earnings, I think…

Read more »