Today I am looking at telecommunications giant Vodafone Group‘s (LSE: VOD) (NASDAQ: VOD.US) dividend outlook past 2014.
Dial-in for delectable dividends
Vodafone has a stellar history of offering investors above-average dividend yields, its inflation-busting payout policy keeping income investors happy even as enduring problems in its core European markets have eroded earnings.
And City number crunchers anticipate fresh earnings weakness to transpire over the medium term, with a 2% earnings decline for the year concluding March 2014 expected to be followed by a steep 30% decline in the following 12-month period. Further out, the firm is expected to stage a modest recovery in 2016 with a 6% bounceback.
Despite these insipid projections, however, the telecoms play is expected to keep its progressive dividend policy chugging along. Indeed, forecasters anticipate a 5% rise in the full-year payment this year to 10.7p per share, with additional 2.8% Â and 4.6% increases pencilled in for 2015 and 2016 correspondingly, to 11p and 11.5p.
And these prospective payments for each of the next three years carry sizeable yields of 4.5%, 4.7% and 4.9% respectively, comfortably above the current forward average of 3.2% for the broader FTSE 100.
However, a worry for investors will be a heavy erosion of dividend coverage over the next few years, with a reading of 1.4 times predicted earnings anticipated to fall to 1 in both 2015 and 2016. Still, dividend investors should take comfort from Vodafone consistently building the payout each year, even with dividend coverage having remained below the widely-regarded safety watermark of 2 since 2010.
Furthermore, Vodafone’s ability to chuck up plentiful amounts of cash should also assuage investors’ fears somewhat — the company reported sizeable free cash flow of £1.84bn during March-September, up from £1.77bn during the corresponding period in 2012.
Still, investors should be aware of the strain of Vodafone’s extensive expansion plans on its ability to continue shelling out sizeable payouts.
The company has vowed to invest £7bn to facilitate organic growth under its Project Spring banner, a move designed to upgrade its 3G and 4G networks and to expand its operations in emerging markets. And following the firm’s acquisition of Kabel Deutschland last year, Vodafone is also being tipped to make further acquisitions in the near future, and has been linked with a bid for India’s Tata Teleservices in recent days.
The heavy capital expenditure required to achieve these plans, made against sustained revenues pressure in Europe, could potentially hamper Vodafone’s ability to keep dividends rolling along at a solid pace. But in my opinion, I believe that the company’s growth plans should boost its long-term earnings outlook and keep payouts moving steadily higher well into the future.