A commitment to a steadily-rising dividend used to be a key attraction to investing in Vodafone (LSE: VOD) (NASDAQ: VOD.US).
But along with the firm’s 2013 results, chief executive Vittorio Colao told us that
“The Board remains focused on balancing ongoing shareholder remuneration with the long-term investment needs of the business, and going forward aims at least to maintain the ordinary dividend per share at current levels“.
So we might not get any cash rise at all. Hmm.
Wise?
That’s possibly a wise stance to take. Any company can — indeed should — adjust its dividend policy as necessary, in order to do what’s best for the business.
But it did worry some long-term investors, giving the signal that Vodafone is perhaps not yet the mature blue-chip dividend payer that it seemed.
Vodafone has of late been all about acquisitions, special dividends, and thoughts of getting rich quick from wealthy American predators — and that pushed the share price up a fair bit. But with takeover mania cooling off, the price has slipped back since the start of 2014, and at 193p today it’s just 6% up over the past 12 months (and down 17% since the Fool’s Beginners Portfolio sold). Meanwhile, the FTSE 100 has managed a gain of 9%.
The cash
What about those actual dividends?
They’ve been pretty good. Vodafone has provided yields averaging 5.1% over the past five years, and analysts are forecasting rises for the next two. There’s 11.4p predicted for the year ending March 2015 for a 3.6% rise, and that would grow by another 3.5% to 11.8p the following year.
If you buy now and those forecasts prove accurate, you’ll be pocketing a cool 5.9% this year followed by 6.1% next — some of the best yields on the market. So what’s the snag?
It’s all about cover. There’s a 60% drop in earnings per share (EPS) to just 7p being suggested for 2015, and that would cover only 61% of the cash needed for the dividend. Things don’t look much better for 2016, with a slight EPS rise to just 7.4p — only 63% of the predicted dividend.
The future
What does the company say?
With this year’s results, Mr Colao said that
“our intention to continue to grow dividends per share annually demonstrates our confidence in strong future cash flow generation“.
So there’s perhaps a bit of a retreat from last year’s position — but there’s no specific commitment. And unless earnings rise pretty sharply in the not-too-distant future, today’s yields will be unsustainable.