Vodafone (LSE: VOD) shares are close to their 52-week lows right now. As a result of this share price weakness, they currently sport a very high dividend yield.
Should I buy the shares for the big yield? Or should I look at other dividend stocks instead? Let’s discuss.
Is Vodafone’s dividend sustainable?
For the year ended 31 March, Vodafone declared a dividend payout of nine euro cents per share. At today’s share price and exchange rate, that translates to a yield of over 10%.
I don’t think that level of payout is sustainable going forward, however. One reason I say this is that this financial year Vodafone is only expected to generate earnings of 8.6 euro cents per share. In other words, earnings will not cover a nine euro cent dividend.
Another is that debt remains high. At 31 March, Vodafone had net debt of €34bn on its books. That translates to a lot now that interest rates are much higher than they were.
I’ll point out that I’m not the only one who believes investors could be looking at a dividend cut here.
Telecoms research firm Enders Analysis appears to share my view. “With the shares now yielding north of 9%, it is clear that Vodafone is a dividend stock incorporating the expectation of a dividend cut“, it recently told clients.
So do analysts at Bank of America. They recently flagged risks of a 30% cut to the dividend.
Given the uncertainty over the payout here, I see the stock as quite risky. A dividend cut could result in far less income than I expected and/or share price losses.
Share price downtrend
Speaking of the share price, this is another thing that concerns me at the moment. Not only are Vodafone shares near 52-week lows right now, but they’re also near 25-year lows.
Where this current downtrend ends is anyone’s guess.
Now, the stock’s valuation is quite low at present, with the price-to-earnings (P/E) ratio sitting at around 10. However, it could get lower from here.
Given the lack of share price momentum, I think it’s risky to buy the stock now.
Turnaround plan
It’s worth pointing out that Vodafone has a new CEO, Margherita Della Valle. And she has plans to streamline the company’s operations and improve its performance, which has been lacklustre of late.
“Our performance has not been good enough. To consistently deliver, Vodafone must change,” she said in the company’s recent full-year results.
Her plans involve focusing on three priorities: customers, simplicity, and growth.
If she can turn things around, Vodafone’s share price could get a boost.
This is a large, complex company, however. So a turnaround isn’t likely to be easy.
My move now
Putting this all together, I won’t be buying Vodafone shares for my portfolio in the near future.
All things considered, I think there are better dividend stocks to buy.
