The FTSE 100’s Best Dividend Picks: Vodafone Group Plc

Today I am looking at why I consider Vodafone (LSE: VOD) (NASDAQ: VOD.US) to be a solid dividend contender.

Monster yields predicted to head higher

Telecoms leviathan Vodafone has an exceptional history of offering year-on-year dividend growth. Facilitated by its gigantic capital pile, the business has been able to keep its progressive payout policy even though earnings per share (EPS) have shaken wildly during the peVodafoneriod — Vodafone has seen earnings fall in three of the past five years.

And even though City analysts expect the business to post a colossal 61% decline for the year concluding March 2015, Vodafone is still anticipated to lift the full-year payout 4% to 11.4p per share. Earnings are expected to rebound a modest 7% next year, however, a scenario that is predicted to underpin a further 4% payout to 11.8p.

These projections create massive dividend yields of 5.8% and 6% for 2015 and 2016 correspondingly. Not only do these figures take out a forward average of 4.9% for the complete mobile telecommunications sector, but a respective reading of 3.2% for the FTSE 100 is also taken the cleaners.

… but mind the earnings gap

Still, for those seeking cast-iron dividend prospects, Vodafone could be considered a less-than-stellar selection. Indeed, predicted payouts for this year and next exceed predicted earnings — EPS for 2015 and 2016 are put at 6.5p and 7p respectively — a situation which could threaten near-term payouts.

Vodafone remains an enviable cash generator, however, and free cash flow registered at a formidable £4.4bn during fiscal 2014. And the firm advised in May that it expects to maintain “positive free cash flow after all capex, before M&A, spectrum and restructuring costs”, a situation that should underpin further dividend growth.

I believe that Vodafone’s aggressive asset-adding strategy — acquisitions over the past 12 months include ventures into the multi-services cable sector with Germany’s Kabel Deutschland and Spain’s Ono — on top of its huge £7bn organic investment programme should deliver a turnaround in Europe and strong growth in emerging regions.

So although near-term yield projections may come under some pressure as troubles on the continent persist, I believe that yields should continue to soar above the market average. And in coming years I believe that the firm’s heavy investment — allied to improving economic conditions in Europe — should drive payouts through the roof.

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Royston Wild has no position in any shares mentioned.