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Vodafone has cut its dividend. Don’t say I didn’t warn you

FTSE 100 telecoms firm Vodafone Group (LSE: VOD) has cut its dividend. Read on and I’ll reveal what I’d do with the share now.

This is what happened

In the full-year results report delivered on 14 May, the directors announced a total dividend for the year of nine eurocents per share, “implying a final dividend per share of 4.16 eurocents.” However, last year, the total dividend was 15 eurocents, so the dividend is down by 40% — ouch!

But could you have seen it coming? I believe so. Vodafone’s share price had been falling since December 2017 and is now around 45% lower than it was then. I’d previously believed that the firm had been over-valued, but the sinking share price pushed the anticipated dividend yield up to more than 8%.

I reckon the stock market is often smarter than we give it credit for. A prolonged plunge in any firm’s share price prompts me to ask why. On top of that, any dividend yield above 7% or so should be closely examined, and I did just that in an article at the beginning of April headlined, “Is Vodafone’s 8%-plus dividend yield safe?”

Flat financial figures

I looked at Vodafone’s financial record and concluded that over the previous five years, cash flow and net debt had been stable, but the dividend had been flat over the period. I argued that “it would take moderately rising cash flow each year to support an advancing dividend.”

Vodafone failed a fundamental test that I have for a dividend-led investment – that cash flow, earnings and the dividend rise a little each year. I ended the article by saying, “one possibility is that the fat dividend could receive a haircut! So, I’m staying away from the shares and consider the firm’s dividend to be unsafe at its present level.”

There was enough evidence for me to avoid Vodafone shares even though I didn’t know for certain that a dividend cut was coming. But that’s about as accurate as we can be with the process of investing, given that private investors are not privy to inside information – it’s a bit like trying to thread a needle with boxing gloves on.

This is what I’d do now

Tuesday’s report revealed an inflow of cash from operating activities of €12,980m and an outflow of cash for investing activities of €9,217m. In the prior year, the proportions were similar, which suggests that Vodafone’s is a capital-intensive business. Constant reinvestment into its networks and technologies seems to be normal, but does that investment score Vodafone any advantage that could move earnings up in the future, or is it a race just to keep up and not be left behind? There’s nothing in the financial record to suggest that Vodafone is gaining ground on earnings, so my opinion about the firm as an investment remains unchanged and I’m avoiding the shares.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.