Last spring, Vodafone (LSE:VOD) bowed to what many considered to be inevitable and cut the dividend on its shares.
The FTSE 100 firm announced plans to cut the annual dividend for this financial year (to March 2025) by a whopping 50%. It said the decision to rebase cash rewards “at a sustainable level…. ensures appropriate cash flow cover and sufficient flexibility to invest in the business for growth“.
While disappointing to income investors, Vodafone sought to soothe the blow by pledging share buybacks and stressing its “ambition to grow [dividends] over time“.
So should I consider buying Vodafone shares for a passive income?
Down, then up
| Financial year ending March | Predicted dividend | Dividend yield |
|---|---|---|
| 2025 | 4.5 euro cents | 5.2% |
| 2026 | 4.2 euro cents | 4.9% |
| 2027 | 4.3 euro cents | 4.9% |
As the table shows, dividends are tipped to fall again next year before rising modestly in financial 2027. But on the plus side, the dividend yields on Vodafone shares still surpass the FTSE 100 average of 3.5%.
But how realistic are current forecasts? The first thing to look at is dividend cover, for which I’m seeking a figure of two times or above for a wide margin of error.
Vodafone doesn’t score highly here for this year, even after the planned debasement. Cover is just 1.4 times.
In better news, dividend cover rises to a sturdy 1.9 times and 2.1 times for financial 2026 and 2027, respectively.
Debts high but falling
Given the company’s still-high debts, this improvement is essential to me as a potential dividend-seeking investor. As of September, Vodafone’s net debt was €31.8bn.
This debt is still higher than I’d be looking for. However, free cash flow remains robust (this is tipped at €2.4bn or above for financial 2025). And the business is taking a proactive approach steps to slash borrowings.
Offloading Vodafone Spain helped bring net debt down by around a billion and a half euros in six months. Vodafone Italy’s sale in December has been used to reduce the total still further, Vodafone says.
The business is also undergoing significant restructuring to mend the balance sheet. Its decision this month to buy another €480m worth of shares underlines the confidence it has that things are going to plan.
Taking a broader view
When it comes to future dividends, there are less risky passive income shares for investors to choose from. Vodafone’s debts are still high, and its operations remain as capital-intensive as ever.
Vodafone also continues to struggle in its biggest market. While group service revenue growth accelerated to 5.2% in quarter three, the decline in Germany worsened to 6.4%.
But while I wouldn’t buy Vodafone shares just on the basis of near-term dividends, I think it could be a top stock to own for its overall long-term outlook.
As with other telecoms shares, I think earnings and dividends could rise strongly over the long term as the digital economy continues to grow. I also like its vast exposure to African markets where demand for data and mobile money services is booming. Organic service revenues here leapt 11.6% in quarter three.
Finally, its tie-up with Three provides tantalising sales opportunities and the possibility to get costs further under control.
Given its low price-to-earnings (P/E) ratio of around 10 times, I think Vodafone’s shares are worth serious consideration.
