Vodafone dividend decision gives big boost to income seekers

by Richard Hunter from interactive investor |

Keeping its dividend after encouraging results is great for income seekers, writes our head of markets. 

At any given moment, Vodafone (LSE:VOD) is spinning many plates but there are signs in these full-year results that the overall picture is improving after some difficult times.

An improvement in revenues and a return to pre-tax profit of €795 million for the year ended 31 March 2020, compared to a previous loss of €2.6 billion, are a case in point. The net loss has also narrowed significantly to €455 million versus €7.6 billion as several of its strategic aims begin to take shape. 

In particular, the acquisition of Liberty Global’s assets in Germany and Central Eastern Europe are already making a notable contribution, with the increasingly important German unit reaping the rewards of retail growth.

The purchase also offers other tangible benefits, such as significant projected cost synergies, plus a potentially rich seam of cross-selling opportunities, where customers using multi-product services tend to lead to improved retention. 

At the same time, costs in general are under continuous review and the gradual reduction of the store footprint could be a sign of things to come as the group increases its digital presence. 

Source: TradingView. Past performance is not a guide to future performance.

As well as the consumer, Vodafone’s business offering is also showing signs of progress as the prevalence of remote working and multi-site operations increases exponentially during the current crisis.

The long-awaited sale of the European Tower Assets is also gathering pace, with an IPO expected in early 2021, which should make some inroads into a bloated net debt balance. Vodafone also remains in the vanguard of the 5G roll-out and already has a presence in 97 cities across eight European markets.

The company remains a prodigious cash generator, and the fact that it has maintained the dividend will be a pleasant relief to increasingly starved income-seekers. The projected yield of over 7%, even if partly driven by a weaker share price, is nonetheless particularly attractive given not only the current interest rate environment, but also the relative lack of income options elsewhere. 

All is not plain sailing, however. In particular, the Liberty Global acquisition and spectrum costs have contributed to a vastly increased net debt figure of over €42 billion, and, while the figure remains within the company’s guided leverage range, it has also meant that moves such as the TowerCo IPO have become necessary to whittle this down.

In addition, the ever-present threats of unwaveringly intense competition and vital capital investment remain significant potential drags on cashflow.

The escalation of the Covid-19 epidemic has been something of a curate’s egg for Vodafone. On the one hand, there has been an inevitable spike in the use of data traffic which plays into the group’s hands, and the efficiency and availability of its networks gain extra importance in times such as these. 

At the same time, lower international travel has impacted Vodafone’s roaming revenues, while the very real threat of cyber-attacks has also increased over the last couple of months as both individuals and companies are targeted.

In all, Vodafone has defied the odds during a difficult year. Prospects may have improved, but there is some considerable way to go in assuaging investors who have seen the shares plummet 46% over the last two years.

Even within the last 12 months, the shares have dropped 19%, as compared to a dip of 17.5% for the wider FTSE 100 index, although the maintenance of the dividend will be of some comfort. 

Despite this underperformance in recent times, Vodafone remains a stock which attracts a strong following among investors given both its own size as well as the range of its possibilities, and the market consensus of the shares as a 'strong buy' has not wavered.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

get more news and expert articles direct to your inbox
Sign up for a free research account and get the latest news and discussion, and create your own Virtual Portfolio
sponsored articles from our partners