Is Vodafone Group plc Next In Line For A Dividend Cut?

Today I am looking at why I believe Vodafone (LSE: VOD) (NASDAQ: VOD.US) shareholders could see dividends fall.Vodafone

Dividends expected to keep rising…

Even though trading conditions continue to deteriorate for Vodafone and its telecoms rivals, the City’s army of analysts certainly don’t think these issues are likely to smash the dividend in the near-term.

The rate of growth is anticipated to slow from a chunky compound annual growth rate of 7.3% punched during the past five years; having said that, current forecasts indicate that Vodafone will lift the full-year payment 2.7% during the year ending March 2015, to 11.3p per share. An extra 3.5% hike — to 11.7p — is predicted for the following 12 months.

At first glance these projections make the telecoms giant an irresistible pick, generating yields of 5.6% and 5.7% for 2015 and 2016 respectively. Not only do these readings trump the FTSE 100’s prospective average of 3.5%, but a corresponding readout of 4.9% for the complete mobile telecommunications sector is also taken out.

… but investment plans cast shadow on payouts

Still, in my opinion investors should be cautious over whether even these modest expectations for dividend growth can be met, particularly as earnings are expected to exceed dividend payments during the medium term at least.

Due to the effect of intensifying competition and rising regulatory pressure on its European operations, Vodafone is expected to record a 62% earnings slump this year, to 6.6p per share, with only a 3% improvement expected in fiscal 2016 to 6.8p.

And rising debt levels at the communications house could also put the kibosh on dividend growth in coming years. Vodafone reported in July’s interims that net debt rose by £400m to £14.1bn as of the end of June, prompted mainly by a £600m free cash outflow punched as a result of its aggressive capex drive.

Vodafone has made no secret that chucking buckletloads of readies at the problem lies at the heart of its turnaround strategy.

The company has dedicated $19bn to its two-year Project Spring organic investment project, designed to improve its 3G and 4G services across the world, while it also remains heavily engaged on the M&A front — recent acquisitions include the purchase of a 72.7% holding in Greek internet provider Hellas Online €72.7m, as well as telematics provider Cobra Automotive for €115m.

Still, Vodafone does not enjoy the luxury of a bottomless cash well. And with the firm having to plough vast sums in organic investment and acquisition activity to resuscitate its lagging European operations, not to mention improve its footprint in highly lucrative emerging markets, the importance of rewarding shareholders with bumper dividends looks likely to come off a poor second to building a platform for earnings growth.

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Royston Wild has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.