Last year was grim for those holding shares in telecommunications company Vodafone Group (LSE: VOD), at least in terms of their position in the firm’s stock. At today’s 147p or so, the share price has plunged around 36% since last January and the chart tells the story of a steady and relentless meltdown in price.
I’d been concerned about the way the shares seemed to be over-valuing Vodafone for some time. Yet the firm has maintained its dividend over the past few years and the yield is big at around 9%. But there’s no sign of a dividend rise on the horizon, and I like to see a dividend rising a little every year with my investments. Indeed, earnings haven’t covered the dividend payment for some time, but cash inflow just about covers it.
However, Vodafone carries a big load of debt, which needs to be serviced. The money to pay interest on borrowings comes from the same cash inflow that pays the dividend, so there’s competition for the limited amount of cash that flows into the business.
Competition and restructuring
There’s also competition in the market for the type of service Vodafone provides, and the firm mentioned it in the recent half-year report. A new chief executive has switched the firm into what looks like turnaround mode, with cost-cutting initiatives, restructuring, and the like. I reckon the dividend could fall into focus and become vulnerable. So, with the shares falling, I’d watch from the sidelines and would be more inclined to invest in Hays (LSE: HAS) instead.
The recruitment company’s second-quarter update today revealed good trading in all the operating geographies. Overall, like-for-like net fees grew 9% for the three months to 31 December, driven by a strong performance from the company’s extensive international business.
Hays carries a net cash position rather than the big debt-load burdening Vodafone, and I reckon that situation will help the company maintain its chunky dividend payments over the coming years. The firm has a good record of raising the dividend payment a little each year, which I find encouraging.
Cyclical, but trading well
The recruitment sector is known for its cyclicality and you can see in the share-price chart how the stock plunges and rises according to prevailing economic fears of the day. But, over the past six years or so, earnings, revenues and the dividend have been on a steady upward trajectory, with no sign of a wobble. Indeed, City analysts predict robust trading ahead. Meanwhile, chief executive Alistair Cox said in the report “the outlook is good across most International markets.”
On balance, I’d rather risk my capital on Hays than on Vodafone and I’d aim to buy some of its shares when the price had cycled down, such as now. As said, the firm’s operations are cyclical, but the enterprise is growing too. And the dividend income would be useful to collect while holding the shares and waiting for operational progress to deliver capital growth from a higher share price.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.