At 73.8p per share, Vodafone Group (LSE:VOD) shares have lost a whopping 34% of their value over the past year. It’s a descent that has sent the yield — according to current dividend forecasts — into double-digit territory.
City analysts expect the FTSE 100 firm to keep delivering dividends of 9 euro cents per share for the next three years (to March 2026). This means the company carries a mighty 10.4% dividend yield, far ahead of the FTSE index average.
A plummeting share price leaves the telecoms titan trading on a forward price-to-earnings (P/E) ratio of 10.2 for this year. It’s a reading that’s also well below an average of 14 times for FTSE 100 shares.
So should I buy Vodafone shares on the expectation of big dividends? Or is the company a classic value trap?
Good and bad
One of the first things to look at is the strength of dividend cover. It’s a metric that ascertains how well predicted payouts are covered by anticipated earnings.
Alarmingly Vodafone doesn’t score too highly on this front. For this financial year brokers think dividends per share will exceed earnings per share.
Things improve for the following two years, reflecting City predictions of profits growth. But cover still ranges between 1 and 1.1 times, leaving little room for safety if earnings disappoint.
Yet the telco’s exceptional cash flows could still give it the means to keep the dividend at 9 cents. Despite tough conditions it looks on course to generate adjusted free cash flow of €3.3bn in financial 2024.
The jury’s out
The truth is that I’m not convinced Vodafone will pay the dividends City analysts are expecting. As a potential investor, I also need to consider the impact that large debt repayments could have on dividends. Net debt stood at an uncomfortable €33.4bn as of March.
Having said that, I still expect the company to deliver dividends far ahead of what most other FTSE 100 stocks will pay. Let’s say that Vodafone slashes annual payouts by 30% in financial 2023, as some analysts have tipped. This would still yield a market-beating 6.9% dividend yield.
Should I buy?
Vodafone faces an assortment of challenges right now.
As well as having to drastically cut its debt — a task made all the more difficult by the massive sums it has to invest in infrastructure — the company also has to turn around its struggling German division. Revenues in its core market continue to fall following changes to telecom bundling laws.
Yet as a long-term investor I still find Vodafone shares very appealing. I’m expecting demand for its services to steadily grow as the digital takeover of our everday lives rolls on. I also like the company’s vast exposure to fast-growing African nations.
And I’m encouraged by the firm’s transformation strategy under new chief executive Margherita Della Valle. This will see the business concentrate more effectively on Vodafone Business and slim down its global operation.
At current prices, I think the FTSE company could be a brilliant bargain. I’ll be looking to buy some Vodafone shares when I next have cash spare to invest.