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Final spring, Vodafone (LSE:VOD) bowed to what many thought of to be inevitable and reduce the dividend on its shares.
The FTSE 100 agency introduced plans to chop the annual dividend for this monetary yr (to March 2025) by a whopping 50%. It mentioned the choice to rebase money rewards “at a sustainable degree…. ensures acceptable money movement cowl and adequate flexibility to put money into the enterprise for progress“.
Whereas disappointing to earnings traders, Vodafone sought to assuage the blow by pledging share buybacks and stressing its “ambition to develop [dividends] over time“.
So ought to I take into account shopping for Vodafone shares for a passive earnings?
Down, then up
| Monetary yr ending March | Predicted dividend | Dividend yield |
|---|---|---|
| 2025 | 4.5 euro cents | 5.2% |
| 2026 | 4.2 euro cents | 4.9% |
| 2027 | 4.3 euro cents | 4.9% |
Because the desk reveals, dividends are tipped to fall once more subsequent yr earlier than rising modestly in monetary 2027. However on the plus facet, the dividend yields on Vodafone shares nonetheless surpass the FTSE 100 common of three.5%.
However how life like are present forecasts? The very first thing to take a look at is dividend cowl, for which I’m looking for a determine of two occasions or above for a large margin of error.
Vodafone doesn’t rating extremely right here for this yr, even after the deliberate debasement. Cowl is simply 1.4 occasions.
In higher information, dividend cowl rises to a sturdy 1.9 occasions and a couple of.1 occasions for monetary 2026 and 2027, respectively.
Money owed excessive however falling
Given the corporate’s still-high money owed, this enchancment is important to me as a possible dividend-seeking investor. As of September, Vodafone’s internet debt was €31.8bn.
This debt continues to be larger than I’d be in search of. Nevertheless, free money movement stays sturdy (that is tipped at €2.4bn or above for monetary 2025). And the enterprise is taking a proactive method steps to slash borrowings.
Offloading Vodafone Spain helped convey internet debt down by round a billion and a half euros in six months. Vodafone Italy’s sale in December has been used to scale back the overall nonetheless additional, Vodafone says.
The enterprise can also be present process vital restructuring to fix the steadiness sheet. Its choice this month to purchase one other €480m value of shares underlines the boldness it has that issues are going to plan.
Taking a broader view
On the subject of future dividends, there are much less dangerous passive earnings shares for traders to select from. Vodafone’s money owed are nonetheless excessive, and its operations stay as capital-intensive as ever.
Vodafone additionally continues to wrestle in its greatest market. Whereas group service income progress accelerated to five.2% in quarter three, the decline in Germany worsened to six.4%.
However whereas I wouldn’t purchase Vodafone shares simply on the idea of near-term dividends, I believe it might be a prime inventory to personal for its total long-term outlook.
As with different telecoms shares, I believe earnings and dividends might rise strongly over the long run because the digital economic system continues to develop. I additionally like its huge publicity to African markets the place demand for information and cellular cash companies is booming. Natural service revenues right here leapt 11.6% in quarter three.
Lastly, its tie-up with Three gives tantalising gross sales alternatives and the chance to get prices additional beneath management.
Given its low price-to-earnings (P/E) ratio of round 10 occasions, I believe Vodafone’s shares are value critical consideration.
