Large, cash-generating companies are exactly what income investors look for — they can deliver stable cash flows to fund dividend payouts, and generally don’t vary too much in terms of their overall value. Today I want to look at two FTSE 100 companies that fit the bill — one of which I like quite a lot, and one of which I have concerns about.
Investors in Vodafone Group (LSE: VOD) were handed a very pleasant surprise earlier this summer when the shares jumped 10% in one day on the news that CEO Nick Read wants to spin off the company’s European tower network into a separate business called TowerCo, which may be floated on the stock exchange.
The proposed deal would generate around €20bn (£18bn) and create a company with more than 60,000 towers across mainland Europe. The deal is exciting to investors primarily for its potential to pay down some of Vodafone’s debt mountain, which stood at around €48bn (£43.5bn), as reported by my colleague Harvey Jones. Shares of Vodafone currently yield a nice 5.2%, just above the FTSE 100 average of 4.7%. Its dividend was cut back in May (another debt-reducing measure), ending a 20-year streak of increases, and management now claims that it now has ample room to manoeuvre.
In its most recent trading update for the quarter that ended on June 30, the company reported slightly falling revenues, which the bosses chalked up to exchange rate effects. Stagnant growth is never a great sign, but I think it is less of a concern for a company with a market capitalisation of £41bn. Overall, I think that Vodafone is a good addition to an income portfolio, with the TowerCo deal being a nice cherry on top for the future.
When it comes to defensive income stocks, utilities are generally near the top of the list. After all, people need electricity and gas, even during tough times. Of course, I wouldn’t expect to see this stock making any significant gains — after all, its operates in a pretty saturated market. But if we’re talking about reliable stocks for a retirement portfolio, it certainly fits the bill. This is why National Grid (LSE: NG) looks attractive on paper — a solid 5.6% dividend yield and a healthy balance sheet.
However, I believe that the current political environment throws up a number of risks for shareholders of this utility company. For one thing, regulatory body Ofgem has recently voiced its concerns about energy prices, and could introduce caps that would hit National Grid’s bottom line, thus putting its dividend at risk.
Moreover, a Jeremy Corbyn-led Labour victory at the next general election is a real possibility, which means wide-ranging nationalisation of public utilities is also very much on the table. Given that this would be the most left-wing government that the UK has had in decades, I would advise National Grid shareholders to brace themselves. For these reasons I am choosing to stay away from this stock.
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Stepan Lavrouk 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.