As Vodafone returns to underlying growth, is the 6% dividend yield safer?

Here’s why I think the asset strategy and better earnings improved the outlook for Vodafone’s ongoing shareholder dividend payments a little today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

FTSE 100 telecoms giant Vodafone (LSE: VOD) released its third-quarter trading update today. The company declared the business has returned to service revenue growth of 0.4% year on year. That beats a decline of 0.4% suffered in the second quarter.

The report hails this outcome as a “resilient” trading performance driven by “continued commercial momentum,” despite ongoing lockdowns.

However, service revenue is an alternative measure designed to highlight the underlying growth in the business. And overall, total revenue declined by 0.3% in the period.

Vodafone shares are up today

The share price looks buoyant today. And at just above 131p, the dividend yield is near 6%. But the directors rebased the shareholder payment lower in 2019, which isn’t an ideal scenario for income-seeking investors. On top of that, Vodafone’s shares trade more than 40% below their level three years ago. So shareholders have suffered declining income and capital losses over the period.

One of Vodafone’s attractions is its vast infrastructure network. Competitors can’t replicate the set-up easily. But maintaining and developing the infrastructure requires vast sums of capital investment. And Vodafone must invest constantly to maintain the competitive advantage of the business.

One consequence is the big debt-load carried by the firm. And the servicing of debt interest tends to compete with the servicing of shareholder dividend payments. However, the company is reducing its ongoing costs by sharing its networks with other firms for a fee. And there’s also a strategy of investing in infrastructure via joint ventures.

A positive outlook

Chief executive Nick Read said in today’s report the recent good trading makes him “confident” in the full-year outlook. The company expects adjusted EBITDA to be between €14.4bn and €14.6bn and free cash flow to be “at least” €5bn. That anticipated cash flow performance is consistent with the five-year record. And it confirms that steady flows of incoming cash is one of Vodafone’s big strengths.

Read also mentioned the upcoming Initial Public Offering (IPO) of Vantage Towers (Vodafone’s radio tower business) in early 2021. The flotation is set to raise money for Vodafone. And Read said it will now include the firm’s 50% shareholding in its UK towers joint venture with Telefonica.

Meanwhile, City analysts following Vodafone expect overall earnings to increase by just over 30% for the trading year to March 2022. That will raise the cover for the anticipated dividend to just over one. I like to see higher cover from earnings. But, in the case of Vodafone, free cash flow has historically covered the shareholder payment well. Nevertheless, cover from free cash didn’t prevent the recent cut in the dividend.

On balance, I think the outlook for ongoing shareholder dividend payments improved a little today. But Vodafone isn’t the only high-yielding investment I’d consider in the FTSE 100 right now. For example, I’d also run the calculator over companies such as GlaxoSmithKline, British American Tobacco and National Grid.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »