The Motley Fool

The Vodafone share price: is it worth buying for the dividend?

Image source: Getty Images

Right now, the Vodafone (LSE: VOD) share price supports a dividend yield of 5.3%, compared to the FTSE 100 average of 4.5%. At first glance, this looks attractive. But there’s much more to this telecommunications giant than its dividend yield. So today, I’m going to explore the pros and cons of investing in Vodafone at the current level.

Mixed outlook

It has been a bit of a rough year for the company. Back in May, after repeatedly saying it wouldn’t, the company cut its dividend by 40% to try and bolster its balance sheet.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Then, over the following months, City analysts slashed their growth forecasts as Vodafone’s outlook deteriorated. This time last year, analysts were expecting the group to earn €0.12 per share in net profit for fiscal 2020. They’re now expecting just €0.08 of income per share for the current financial year — that’s a significant drop.

Even more concerning is the company’s weak balance sheet. Following the €19bn acquisition of Liberty Global’s assets in Europe, Vodafone’s borrowings are on track to hit a staggering €55bn. Asset sales are in the pipeline to help pay down some of this towering obligation, but the level of borrowing makes me nervous.

Vodafone generated €13bn of cash from operations for fiscal 2019, implying it would take more than four years for the enterprise to pay off its debts entirely. This would be impossible, because the group would still have to fork out for spectrum rights, which are rising in cost. In Germany, for example, the company has had to pay out €1.7bn in spectrum rights alone.

Cash flow pressures

All of the above leads me to the conclusion that Vodafone’s dividend is on shaky ground. The company can afford it at the moment, but costs are rising. What’s more, if creditors start to demand higher rates of interest from the group — as compensation for taking on the risk of lending to a highly leveraged business — Vodafone might have to make some tough choices.

These could include cutting the dividend further, or reducing investment. The latter is likely to have a severe impact on the company’s ability to be able to attract and retain customers, so management is unlikely to take that route.

The bottom line

So overall, while Vodafone’s dividend does look attractive, compared to the FTSE 100 average, the company’s high level of borrowing puts me off the stock.

My research tells me there are many other companies out there that offer similar dividend yields but have much stronger balance sheets. In fact, there are 33 stocks in the FTSE 100 that current support dividend yields of 5.3% or more, and 10 of these have dividend cover of 1.5 times or higher.

By comparison, Vodafone’s dividend per share isn’t covered by the group’s earnings, which is a sure sign the payout is unsustainable.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves owns no 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.