Vodafone (LSE: VOD) (NASDAQ: VOD.US) is one of the FTSE 100‘s dividend stalwarts but the company has faltered in recent months. After the sale of its share in Verizon Wireless, the company’s earnings have fallen and a weak European economy has dented the group’s sales on the continent.
However, despite falling sales, Vodafone has tried to maintain its lofty dividend payout. Unfortunately, it now looks as if the company is paying out more than it can afford.
In particular, next year Vodafone is expected to pay a dividend of 11.3p per share to investors, although during the same period, City analysts only expect the company to report earnings per share of 6.5p. These figures indicate that the company’s dividend payout is unsustainable.
Good news
With Vodafone’s dividend payout exceeding the company’s earnings, there’s a chance that the company could be forced to slash the payout. That said, a dividend cut could actually be good news for Vodafone.
By my calculations, cutting the dividend payout by 50% could save the company £1.5bn per annum. Even for a giant like Vodafone, an additional £1.5bn per annum to spend would be a game changer. The cut would give the company enough cash to snap up several smaller peers, driving growth through bolt-on acquisitions.
The extra cash would also help Vodafone pay down its debt pile of £14.1bn, as reported at the end of June.
However, for dividend investors a 50% cut would be bad news. A 50% cut would leave the company yielding only 2.7% at present levels. Nevertheless, there are plenty of other companies out there that support a higher dividend yield and many of them have better growth prospects.
High-yield bright prospects
For example, KCOM (LSE: KCOM) another telecoms company, which operates in and around Hull, currently supports a dividend yield of 5.3%. Management has stated that the company will hike its annual dividend payout by 10% per year for the next two years.
Based on this commitment, during 2015 KCOM’s shares will support a divided yield of 5.8% and during 2016 the shares will support a yield of 6.4%. Current figures indicate that the payout for both 2015 and 2016 will be covered one-and-a-half times by earnings per share.
Moreover, unlike Vodafone, KCOM continues to grow as the company is expanding into the broadband and services market. Growth and expansion into these markets is helping KCOM drive growth, despite falling fixed line revenues.
By using this strategy, City analysts expect the company’s earnings to grow at a steady single-digit rate for the next two years.
Cash balance
Additionally, home builder Persimmon (LSE: PSN) is set to support a dividend yield of 7.1% next year as management progresses with its plan to return £1.9bn to investors. What’s more, unlike Vodafone Persimmon has a healthy cash balance, even though the company has spent millions on acquiring new land for home construction.
The group reported cash and equivalents of £326m at the end of the second quarter, up 580% year on year. This cash balance works out at around £1.06 per share. The company also acquired 10,549 new land plots across 68 sites during the period.
The bottom line
All in all, if Vodafone were to cut its dividend payout the company would have more cash available to spend on paying down debt and chasing growth. There’s no doubt that the cash saved from a dividend cut would help the company return to growth.
Until the company cuts its payout I’m staying away. There are better opportunities out there. KCOM and Persimmon are just two of them.
