Telecoms businesses can be lifeboats for income investors during tough economic periods. Robust dividend forecasts for Vodafone Group (LSE:VOD) shares illustrate how reliable these companies are when it comes to delivering market-beating dividends.
Okay, things aren’t perfect at the FTSE 100 company right now. It’s experiencing operational troubles in Germany, while cash flows are also slipping. This means City analysts expect annual dividends to fall in the short term as a result.
Yet Vodafone shares still offer colossal dividend yields, thanks to their 11% price fall this year. Yields sit at 10.4% and 9.2% for the financial years to March 2024 and 2025 respectively. Both readings shatter the FTSE index’s forward average of 3.8%.
But how solid are these dividend forecasts? And should I buy the telecommunications giant for my portfolio?
Dividend cuts coming?
Talk of a potential dividend cut has dogged investor confidence in Vodafone in recent years. Since the firm slashed the annual dividend from 15.77 euro cents per share to 9 cents in fiscal 2019, speculation of additional cuts have persisted.
But the company has kept annual dividends at this level since then. And City analysts expect the same shareholder reward for the current 12-month fiscal period.
However, brokers are predicting a reduction in the yearly dividend to happen before too long. In fiscal 2025, a cut to 8 cents per share is tipped.
Fragile forecasts?
On the plus side, these dividends forecasts still create those gigantic yields. But an argument can be made that such estimates don’t exactly look very robust. Could bigger cuts be coming, and sooner than the number crunchers currently think?
For one, those expected dividends are covered between 1.1 times and 1.2 times by anticipated earnings. Any reading below 2 times is considered flimsy, according to widespread investing theory.
Then there’s Vodafone’s under-pressure balance sheet to think about. The company expects to continue generating a lot of cash but the amount is expected to decline. Adjusted free cash flow of around €3.3bn is tipped for this year, down from €4.8bn in financial 2023 and €5.4bn the year before that.
In better news though, net debt has dropped sharply of late and was down 20% year on year to €33.4bn as of March. And last week the company announced the sale of its Spanish division for around €5bn (including “at least €4.1bn in cash”) to help it get its debts down further.
The verdict
I think investors should be prepared for dividend cuts at Vodafone. But problems like weak dividend cover and high debts have been around for years, yet the company has still maintained dividends (and also carried out significant share buybacks). So the cuts City analysts predict may not in fact transpire.
But even if they do come, I still expect the telecoms titan to deliver dividends way ahead of most other FTSE 100 shares. It’s why I’m considering buying the company when I next have cash to invest.
Vodafone shares now trade on a forward price-to-earnings (P/E) ratio of 10.5 times. I think this is excellent value, and believe now could be the time for me to buy as new chief executive Margherita Della Valle’s transformation programme gets off the ground.
