Vodafone (LSE: VOD) is a brand most people in the UK would recognise, and love it or loathe it, for many years it has rewarded investors very well with generous dividends. But all good things come to an end. Recently the dividend was slashed by 40%, but could this actually be a good thing and make the telecoms giant a worthwhile investment now?
Analysts at HSBC think so. They believe the share price today offers an attractive entry point – and to a degree it’s hard to argue with that as the price hasn’t been so low since the early 2000s. A historically low price though isn’t reason enough to buy the shares, especially when an axe has been taken to the dividend.
The right decision?
Concerns about Vodafone’s balance sheet have been around for some time and the long-held expectation that the dividend was at risk of being cut was proved right. Cutting the payout does give fairly new CEO, Mark Read some breathing space though.
The cut was without doubt severe, but the consequences of letting the dividend take huge amounts of cash out of the business at this time could have been worse as Vodafone is facing headwinds, including increased competition, in many of its markets. It reported a loss in its last full year, it has major debts of more than €27bn yet is taking on more debt to fund a big acquisition, and it is also having to invest in spectrum to support the rollout of 5G.
The good news is that the dividend cut doesn’t completely detract from Vodafone’s status as an income stock, the falling share price meaning the telecoms company still offers a prospective yield of around 5.5% for the coming year. This far exceeds the dividend yields of many FTSE 100 peers.
Investors now have to accept that the the share price decline meant the dividend was just too big for the business to handle and management has taken the brave (and I think correct) action now, rather than kicking the can down the path and potentially making the problem worse in the future.
But what about the firm’s future prospects? The key opportunity for growth for Vodafone is acquisition-led. Yes, investors will want to see organic growth, but the opportunity to expand in Europe also has potential major advantages.
Vodafone is paying €18.4bn ($21.8bn) for Liberty Global’s assets across Europe. The acquisition should help the group roll out broadband, fixed line and TV services across its European markets and the company contends that customer retention improves when those customers have multiple products. The deal therefore could cement its position in Europe where it already has a strong presence in many countries.
The final word
The telecoms company looks to be taking the right steps towards putting itself on a stronger footing. The knocked-down share price means I think it could well be worth adding to a Stocks and Shares ISA, especially because of the potential for the dividend to grow again. Rebasing the dividend has worked well at Tesco and I expect the same will be true at Vodafone given its opportunities for growth.
Andy Ross has no position in any of the shares 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.