Is there a better dividend stock in the UK market?
Telecoms giant Vodafone (LSE: VOD) released its interim results today, and there were few surprises -- which is just how investors like it.
Dialling the right numbers
Group revenue for the first half came in modestly ahead of expectations at £23.5bn, up 3.5% on last year, helped by a double-digit rise in data download revenue due to the rising popularity of smartphones.
Geographically, the general theme of dynamic emerging-markets growth off-setting sluggish European revenues is one we're becoming accustomed to.
Europe itself continues to be a continent of two halves, with resilience in the north (UK, Netherlands, Germany) undermined by falling service revenue in the south (Spain, Italy, Greece), for an overall 1.3% decline.
In contrast, the Africa, Middle East and Asia Pacific region saw service revenue increase by 8.4%. Growth in India was particularly strong, and the only real negative was Australia, where the company evidently still has some work to do to reverse the legacy of negative customer perception from network and service issues in the last financial year.
Meanwhile, Vodafone's US associate, Verizon Wireless, achieved strong organic growth of 7.1%.
Below the top line, the numbers are complicated by disposals of minority stakes in other companies, and share buybacks.
Vodafone sold its 3.2% stake in China Mobile, reduced its interest in Japan's Softbank, and sold its entire 44% holding in French wireless operator SFR to media group Vivendi.
Following the China Mobile disposal, Vodafone bought back £2.8bn of its own shares at an average price of 172p. Since the sale of the SFR stake, it has bought back a further £1.5bn of its own shares, at an average price of 166p, and still has £2.5bn earmarked for buybacks.
The upshot of all this, and other, activity was that first-half adjusted operating profit of £6bn was slightly down on last year, but ahead of analysts' expectations of £5.8bn, while adjusted earnings per share of 7.75p was down 11.5%, but in line with expectations.
At the start of the year, Vodafone's guidance was for full-year operating profit in the range of £11.4 - £11.8bn and free cash flow in the range of £6 - £6.5bn. It now expects operating profit to be in the top half of the range, although there is no change to the guidance on free cash flow.
Since BP (LSE: BP) suspended, and then rebased, its dividend in the wake of the Gulf of Mexico spill 18 months ago, Vodafone has become the darling of UK pension schemes. The company's most recent final payout, of £3.5bn, accounted for 17% of all dividends paid in the quarter.
A forensic assessment of the businesses and accounts of huge global companies may be beyond the capabilities of most of us private investors, but the dividend is one thing that we can readily understand.
In 2010, Vodafone gave us a pretty good idea of what to expect in the next few years: a dividend per share growth target of at least 7% per annum through to the year ending 31 March 2013.
Today's announcement of a 3.05p per share interim dividend is in line with that target. The ex-dividend date is 16 November, and the dividend will be paid on 3 February.
The table below shows the dividends paid and declared, and the minimum forecasted to be paid, according to the company's stated growth target.
|Year end 31 March||Interim (p)||Final (p)||Full year (p)|
|2012 (interim declared; final forecast)||3.05||6.47||9.52|
If you buy Vodafone's shares before 16 November, you will receive the 3.05p interim dividend in February, and can expect to receive a final dividend of at least 6.47p next August.
The shares are currently trading at 177p, so that represents a dividend yield of 5.4% for the year ahead, with the prospect of an inflation-busting 7% increase the following year.
But it gets better. Vodafone will be paying a 'special' dividend of 4p per share alongside the 3.05p interim, which, together with the expected final of at least 6.47p, will give a total for the year of 13.52p per share -- equivalent to a whopping 7.6% yield.
The special one
The special dividend comes as a result of Vodafone's 45% stake in Verizon Wireless, which is majority-owned by Verizon Communications (NYSE: VZ.US).
Verizon Communications needs cash flow from Wireless to fund its own dividend. Until recently, Verizon Communications was receiving this cash via the pay-down of intra-group loans. Once those loans were repaid, however, the parent company needed another way to access Wireless's cash flow.
Hence, in July, Wireless announced it would be paying a $10bn (£6.1bn) dividend to its shareholders -- an amount that covered its parent company's dividend, and gave Vodafone a bumper payout of $4.5bn (£2.8bn).
In the absence of a change in Verizon Communications' dividend policy, it's likely that Wireless will continue to make dividend distributions in the future -- 45% of which will flow to Vodafone.
Vodafone exerts no control over Wireless's dividend, so it would be fairly provocative for it to incorporate any assumptions about future Wireless distributions into its own ordinary dividend policy – hence, the 'special dividend' terminology.
While the special dividends could turn out to be regular in practice, if not in name, Vodafone's board has given itself some wriggle room for the future by avoiding setting the precedent of passing all of the cash received from Wireless on to shareholders: £0.8bn of the £2.8bn has gone towards paying down debt.
Be that as it may, with a prospective 7.6% yield (including the interim special), and on a forward price/earnings ratio of less than 11, is there a more handsome-looking dividend stock than Vodafone in the UK market?
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