These days, when telecommunications is a relatively mature business, it should be a safe sector for dividends. Or so we might have thought. But even though it’s more than a century since Marconi sent his first transatlantic signal, technological change can still bring sweeping changes to businesses.
Look at Vodafone (LSE: VOD)(NASDAQ: VOD.US). It’s only a couple of years ago that the mobile phone giant was offering a 5.2% dividend yield that was around twice covered by earnings. Yet rapidly dwindling traditional mobile phone revenue in the developed world, coupled with the huge costs of 4G network development, has led to two years of pre-tax losses, and there’s an EPS figure of just 6.3p forecast for the year ending March 2015. But there’s still a dividend of 11.5p on the cards. It would yield 4.9% on today’s price of 225p, but it would be barely half covered.
Keep it going?
Vodafone has massive credit available and could keep the dividend going until earnings hopefully recover. And at the interim stage chief executive Vittorio Colao suggested that the raised dividend was testament to the company’s confidence in its 4G plans. But I get decidedly twitchy when I see overstretched dividends, after having seen so many turn bad in my time.
Things look safer at BT Group (LSE: BT-A)(NYSE: BT.US), where there’s a modest dividend yield of 2.9% forecast for the year to March 2015 after 2014 delivered the same. The yield might look a little low, but that’s because the share price has almost quadrupled over the past five years to 445p. Meanwhile, earnings and dividend cash continue to grow nicely every year, with an 15% boost to the interim payment this year — the company told us it was a sign of confidence.
With BT’s recent successful takeover of EE to get back into the mobile business, it’s looking increasingly like a company that has a carefully-planned focus, rather than one that’s just a jumbled collection of businesses around the world, and I’d see its dividend as a very safe one.
Sky (LSE: SKY) has also been increasingly its dividend steadily, and with the shares selling for 1,005p we’re looking at a forecast yield of 3.4% for the year to June. The share price took a brief dip after the company paid big for its latest football rights package, but since then it’s spiked up again and is currently about 6% up over the past 12 months.
Interim results showed a modest 3% rise in adjusted EPS with the dividend up 3%, and that’s not up to the pace of previous growth. But the annual cash payment is prudently covered by earnings, and looks safe enough to me.
My favourite of these three? BT, on a forward P/E of only around 14 and a faster rate of dividend growth.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Sky and Vodafone. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.