Vodafone Group’s (LSE: VOD) share price has sunk 10% since the beginning of 2022. Based on its dividend forecast for this financial year (to March 2023) this decline means its shares now carry a 7.9% dividend yield.
This beats the average FTSE 100 yield of 4.2% by a large distance. And things get even better for investors next year. For then the dividend yield jumps to 8%.
Does the prospect of giant dividends make Vodafone a top income stock to buy? Here I’ll examine its dividend forecasts for the short-to-medium term and reveal whether I’d buy the telecoms giant for my own portfolio.
Dividends tipped to rise!
Vodafone hasn’t grown its dividend for several years. In financial 2019 it rebased the annual dividend from 15.07 euro cents per share to mend its balance sheet and fund infrastructure improvements.
It paid a much-reduced 9 cent dividend payment then. It’s paid rewards at this level during the following three years. And the City expects more of the same this year. However, the payout is tipped to rise to 9.2 cents in financial 2024.
Dividend coverage falls well below the desired security benchmark of two times and over, however. A reading above the two times region provides a wide margin of safety in the event that earnings estimates miss.
For the next two years Vodafone’s expected dividends are covered around 1.2 times by predicted earnings.
Cash machine
It’s worth noting that some investors are sceptical about Vodafone’s ability to meet these medium-term dividend forecasts. As well as that weak dividend cover the business has a lot of debt on its balance sheet. It had €41.6bn worth as of March, in fact.
But I think there’s a great chance that the telecoms firm will be able to meet current dividend estimates. This is thanks to its formidable knack of generating huge amounts of cash.
Adjusted cash flow rose 8% last year to €5.4bn, liquidity which allowed the company to make €2bn worth of share buybacks. And Vodafone says it is on course to generate robust cash flows of €5.3bn in financial 2023.
Reports have emerged recently too that suggest the business is considering selling half of its 82% stake in its masts business, Vantage Towers. This would help reduce debt and give it around £6bn of extra cash to play around with.
The verdict
It’s by no means certain that Vodafone will make this year’s dividend forecasts. But the chances of the company doing it are very high, in my opinion.
And I believe its dividend yields around 8%, combined with a rock-bottom forward P/E ratio of 10.5 times, make it a highly attractive value stock to buy.
What’s more, I’d buy Vodafone shares to hold for the long haul, too. I think the huge investment it’s making in infrastructure, and the rapid rate at which it’s winning customers in fast-growing African markets, could help it make spectacular profits over the next decade at least.