Over the past 12 months, shares in global telecommunications group Vodafone have plunged, falling more than 30% excluding dividends, underperforming the wider FTSE 100 by 25%.
However, earlier this week, the shares jumped after the company announced an upbeat set of results.
Following these numbers, the question is, is now the time to buy into this income and growth story or should investors continue to avoid Vodafone for the time being?
Income champion
Vodafone’s plunge over the past 12 months has turned the company into one of the FTSE 100 top dividend stocks. The shares support a dividend yield of just over 8% at the time of writing, that’s compared to the market average of around 4%.
One of the reasons why investors had been avoiding the company is because analysts are becoming increasingly concerned that the dividend distribution is not sustainable. However, the shares received a boost earlier this week when CEO Nick Read announced the firm would be matching last year’s payout to investors in this financial year. The commitment guarantees the distribution for at least 12 months, which was enough for some investors to dive back in.
But I’m skeptical that Vodafone’s payout is sustainable over the long-term. The company is coming under increasing pressure to cut its tremendous debt load, especially following the €19bn acquisition of Liberty Global’s central European cable networks. Some initiatives, such as the sale of Vodafone’s telecommunications masts are planned to unlock capital, but these are only sticking plasters.
Still, overall the group looks to be pushing ahead, albeit slowly. The recent trading update showed a decline in revenue for the first six months of the company’s financial year of 5.5% to €21.8bn. On the other hand, guidance for the year for growth in adjusted earnings before interest, taxation, depreciation and amortisation (EBITDA) was narrowed to 3% from the previous range of between 1% to 5% while the outlook for free cash flow was increased from €5.2bn to €5.4bn.
Even though the shares jumped on the positive news, City analysts don’t seem enamored by the figures. One set even called the numbers “expectedly wretched.”
Better buys out there
The best dividend stocks have clean balance sheets and room to grow their payouts to investors in the years ahead. Vodafone has neither of these qualities. During the first six months of a company’s financial year, net debt increased by 6.4% to €32.1bn. While this might look sustainable, as it translates into a net gearing ratio of only 50%, to maintain this level of borrowing the company is having to pay around €1bn per annum in interest. As interest rates increase around the world, interest costs are only going to grow, piling the pressure on the dividend.
With this being the case, I would avoid Vodafone. Even though the 8% dividend yield might look attractive, there are plenty of other income stocks out there that I believe will generate much better returns for investors over the long-term.
Disclosure: The author owns no share mentioned.