After disappointing investors with its latest results, Vodafone (LSE:VOD) has become the highest-yielding dividend stock in the FTSE 100. Assuming the company pays shareholders 9 euro cents (7.88p) a share for its March 2024 financial year (FY), it currently offers a return of 10.8%.
However, the increasing yield has nothing to do with the directors feeling more charitable towards the company’s shareholders (like me) — the telecoms giant has paid the same dividend every year since it was last reduced in July 2018.
Instead, during this period, the yield has been driven higher by a 60% fall in the share price. Stagnant revenues and falling profits have weighed heavily on the stock.
How times have changed.
Vodafone’s shares currently change hands for around 74p. As recently as February 2020, they were worth twice as much.
I wonder if they could return to this level over the next few years? If they did, that would mean investing today is the same as buying one and getting one free (BOGOF).
And that would be an amazing return.
It’s all about results
But looking at the company’s results for the six months ended 30 September 2023, I don’t think there’s going to be a quick turnaround. Compared to the same period in 2022, operating profit was 44% lower.
However, I think there are the green shoots of a recovery in sight. Due to some hefty price increases, revenue growth has improved in nearly all its markets.
But Vodafone likes to measure its own performance using adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation after leases). And despite the poor first six months, the directors have reaffirmed their target of €13.3bn for FY24.
This is slightly ahead of the consensus forecast of the 11 analysts covering the stock, which is published on the company’s website.
Looking further ahead, the average of their predictions for FY25 is €13.34bn, with a range of €13.05bn-€13.73bn.
With little change in profit, I can’t see the share price moving upwards any time soon.
And for it to double, earnings would have to do the same. The company’s working its way through a €1bn cost-cutting exercise. And it hopes to merge its UK operations with Three. But the benefits from these are several years away from being realised.
All is not lost
However, a share that’s yielding 10% will pay dividends equal to its current price within 10 years, assuming the level of payout remains unchanged.
And that’s the sort of timescale I consider when investing.
But dividends are never guaranteed. And the analysts referred to above are predicting a cut next year to 7.03 euro cents. Personally, I don’t think there will be a reduction. The sale of its Spanish operations — expected to bring in at least €4.1m — will provide a useful buffer, if one is needed.
In cash terms, a dividend of 9 euro cents is equivalent to 75% of its adjusted free cash flow, so headroom is limited.
Of course, I cannot see 10 years ahead. But, for now, I’m content to hold on to my shares in anticipation of the current payout being maintained on the back of an improving (albeit slowly) financial performance. And whether through share price growth or dividends (or both), I remain hopeful that the value of my shareholding will double.