The Vodafone share price is too good to miss! Why I believe the FTSE 100 9% yielder won’t cut the dividend
Investors don’t like Vodafone Group (LSE: VOD) at the moment. Its share price was under severe pressure prior to October’s broad-based equity sell-off and now it can be found trading at levels not seen for the best part of a decade.
Total losses in the year to date stand around the 40% marker. This provides the opportunity for FTSE 100 investors to pick up a bona fide bargain, in my opinion.
Dividend cut? What dividend cut?!
The main cause for the frantic selling of Vodafone’s shares has been the escalation of concerns over the level of future dividends.
The company’s multibillion-pound ‘Project Spring’ organic investment scheme may be a thing of the past, but the cost of maintaining its network and improving its services still remains colossal. In particular, the purchase of Liberty Global’s assets in Central and Eastern Europe and the impact of expensive 5G mobile spectrum auctions is causing many to suggest that a dividend cut is in the offing.
City brokers don’t think that such a scenario is on the cards though. Sure, they are predicting that Vodafone’s progressive dividend policy will fall as they predict a double-digit earnings drop for the year to March 2019. However, the boffins remain convinced that the firm has the financial strength to keep the payout locked at 15.07 euro cents per share, a figure that yields a mammoth 9.4%.
Yield moves to almost 10%
And it’s not difficult to see why the experts remain seduced by Vodafone’s dividend picture. The company is, simply put, a cash-generating colossus, as illustrated by July’s trading update in which it advised that free cash flow (excluding the likely costs associated with spectrum) should be “at least” €5.2bn in the current year.
This would reflect a drop from fiscal 2018’s corresponding reading of €5.4bn, but is still a reassuringly robust figure, and particularly so given the prospect of a hefty earnings drop.
Right now, in fact, the number crunchers are expecting payouts at Vodafone to rise before they fall. Helped by an anticipated 14% profits rise next year they are projecting an improved reward of 15.5 euro cents, a number that drives the yield to a staggering 9.7%.
It’s always been an expensive selection but right now Vodafone no longer commands a premium valuation. And sooner or later I believe that this will lead to a flurry of buying from value hunters.
Right now it carries a forward P/E ratio of 15.8 times, just a smidgen above the accepted value territory of around 15 times (and below). That’s low at the best of times, but scandalously cheap given the telecoms titan’s brilliant long-term earnings opportunities in Europe and in emerging markets alike.
Vodafone is all set to declare half-year results in the next few weeks. Should it elect to at least keep the interim dividend on hold from the previous year, as I of course fully expect it to, then its share price could really fly. Consequently I think now is a shrewd time to buy into the communications giant.
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Royston Wild 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.