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Coming up with a dividend forecast for Vodafone (LSE:VOD) appears straightforward. For the past five financial years, the annual return to shareholders has been 9 euro cents (7.78p) per share.
But a loss of market share in key territories has put downwards pressure on the company’s share price. It’s fallen 23% over the past year, and it’s down 48% since October 2018.
This has helped push the yield to over 10%.
Such a high return is rare for a FTSE 100 company and is a warning sign that investors think the present level of dividend is unsustainable.
Expert opinion
Most of the nine analysts covering the stock appear to agree with this gloomy assessment.
The company has just updated its summary of their dividend forecasts.
It now shows an average expectation for the year ended 31 March 2024 of 7.35 euro cents (6.35p) a share, rising to 7.58 euro cents (6.55p) the following year. Compared to the previous version, these figures are slightly lower.
If correct, this implies a current yield of 8.1%. Still very healthy — and well above the FTSE 100 average of 3.9% — but likely to send the share price lower as investors don’t react well to cuts in dividends.
But there’s a big variation in the forecasts.
The most optimistic analyst is expecting an increase in the 2024 payout to 9.38 euro cents (8.11p).
At the other end of the scale, the most pessimistic is anticipating a 50% reduction to 4.50 euro cents (3.89p).
Fingers crossed
But I’m certain the company will be doing everything it can to maintain the status quo.
The relatively new chief executive of the company, Margherita Della Valle, is currently overseeing a number of organisational changes.
If the intention was to reduce the return to shareholders, I’m sure it would have been announced immediately on her appointment. A change of boss is always a good opportunity to disclose bad news as it can be blamed on their predecessor!
It’s all about the cash
Last year’s dividend of 9 euro cents cost €2.88bn.
And if the directors are under pressure to find some cash savings in order to maintain this, I’m sure some could be easily found.
Despite its troubles, the company generated €18.1bn of cash from its operating activities during its 2023 financial year.
Looking at the statement of cash flows, capital expenditure was €10.1bn. It also repaid borrowings of €10.4bn (net). Reducing either could release a significant amount of cash.
But cutting investment and increasing debt isn’t a good recipe for success.
And this is the balancing act that the directors face — satisfying the short-term demands of shareholders without jeopardising the long-term needs of the business.
Verdict
Although I wouldn’t rule out a cut in the dividend, having looked at the numbers I’m now more confident that the company will pay at least 9 euro cents in 2024 and 2025.
But it’s likely to be a long time before the changes at Vodafone feed through to its bottom line. Any further deterioration in the business would put pressure on cash. In these circumstances, I’m sure the dividend would be cut.
That’s why I’ll be taking a detailed look at the company’s results for the six months to 30 September 2023, which are due to be released on 14 November 2023.
