Interactive Investor

Is Vodafone about to cut its dividend?

After Q3 results failed to resurrect demand for the shares, one team of City analysts outlines their expectations for the dividend, financial performance and latest price target.

7th February 2024 13:56

Graeme Evans from interactive investor

A 40% cut in the Vodafone Group (LSE:VOD) dividend has been forecast as the City prepares for a “more constructive” payout policy alongside May’s annual results.

Vodafone shares currently yield dividend income above 11%, fuelling expectations that a big reduction is in store for the mobile phone giant’s large band of retail investors.

Chief executive Margherita Della Valle will update capital allocation priorities once 4.1 billion euros (£3.5 billion) is banked from the imminent sale of its Spain operations.

The outcome of the review should be the focus of full-year results on 14 May, potentially removing a major source of uncertainty hanging over the stock.

The London market’s one-time biggest company continues to trade at its lowest level in over two decades, despite Della Valle’s restructuring efforts in Spain and Italy and the proposed merger of UK operations with Three owner Hutchison.

This week’s trading update also showed top-line momentum in several countries in Europe and Africa, but with Voda’s largest market of Germany still under pressure the shares are 7% lower year-to-date and below 65p this afternoon.

Bank of America says forecasting the financial outlook for Vodafone is complex and uncertain given that there are deals at various stages of progress in Spain, UK and Italy.

Its analysis suggests 2025-28 cash flows will be diluted 23% from pre-deal levels at an average 2.2 billion euros (£1.9 billion), below the 2.5 billion (£2.1 billion) current dividend outflow.

The bank said: “Our view is that while a brief period with the dividend uncovered could be considered, a three-to-four-year gap is too long and that Vodafone will choose to rebase the dividend lower to levels that could be guaranteed and used as a base to grow.”

It assumes that a cut of 40% will result in a more secure payout broadly in line with the wider sector and provide Vodafone with a buffer to deleverage.

Such a move would cut the annual dividend from nine euro cents (7.68p) to 5.4 euro cents (4.61p) a share, leading to a yield of 7%.

With the benefit of excess cash flows and disposal proceeds, the company can then consider one billion euros (£850 million) of share buybacks alongside 5% a year dividend growth.

The bank said: “As a 12% total return profile this is not unattractive and is perhaps the best way to see the ‘wood for the trees’ amid the complexity.”

This week’s note highlights a price target of 122p alongside a “buy” recommendation.

The bank added: “Restructuring is complex and Germany faces operational headwinds.

“However, looking through the complexity we envisage a new, more constructive shareholder remuneration policy and portfolio restructuring to provide scale and support better returns, or to exit where there is no route to do so.”

Among other City firms, UBS this week cut its price target by 2p to 98p but still has a “buy” rating. JP Morgan lowered from 88p to 80p with a “neutral” stance.

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