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.
