This FTSE 100 stock has an 11.3% dividend yield! Is it trustworthy?

Here’s a FTSE 100 share that has a very strong dividend, at first glance. But are things really as good as they seem? Let’s explore.

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Vodafone (LSE:VOD) was once the largest stock on the FTSE 100. The telecoms company reached its peak market capitalisation in 2000 during the height of the dotcom bubble.

At that time, its market capitalisation briefly surpassed £250bn, making it one of the most valuable companies in the world.

Today, it’s worth less than 10% of that. Vodafone’s performance over the past 24 years hasn’t lived up to expectations. But what about today? After falling 30.8% over the past 12 months, can Vodafone recover?

Earnings don’t excite

In February, Vodafone maintained its full-year guidance despite reporting a decline in third-quarter service revenues, primarily attributed to decreases in Germany.

The company announced that service revenues fell by 1.4% to €9.3bn on a reported basis, with service revenue growth in Germany declining 0.3%.

In Italy, service revenue experienced a 1.3% dip in Q3, compared to a 1% drop in the preceding three months.

Obviously, these weren’t the most exciting results. But unfortunately, that’s fairly reflective of where Vodafone is at the moment.

Vodafone is expected to reported basic earnings per share of ¢5 in 2024, ¢7 in 2025, and ¢8 in 2026. The issue is that this is down from 2023.

It’s also worth recognising that adjusted earnings have over the past 18 months been distorted by significant one-off events.

In 2023, the sale of Vantage Towers for €8.61bn and operations in Ghana for €689m had a substantial impact on the company’s adjusted earnings.

On an adjusted basis, Vodafone’s trading at 2.1 times earnings from the past 12 months. However, on a non-adjusted basis, Vodafone is trading around seven times 2023 earnings.

Reasons to (not) invest

Vodafone stock has experienced downward pressure for several reasons, notably its sizeable net debt position. This now stands at €36.2bn, which is down from €45.6bn a year ago. 

It’s also the case that the dividend may be under threat. City analysts actually expect Vodafone’s dividend to fall year on year in fiscal 2025. One explanation for that is the coverage ratio. Vodafone can’t afford to retain its ¢9 dividend with just ¢5 in basic earnings.

So while Hargreaves Lansdown states that the Vodafone dividend yield is 11.3%, it’s unlikely that this will be maintained moving forward. The company can’t fund the dividend by selling off business units.

However, investors may be interested in rumours that the firm may be the subject of a takeover bid, according to a 1 March report from Betaville.

With a potential bid price of 100-105p, we’re looking at a premium of around 40% from the current share price. So if the rumours are to be believed, investors could look to pocket 40% in a matter of months. Personally, I’m staying out of it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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