Vodafone Offers 7.6% Yield

Published in Company Comment on 8 November 2011

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%.

Full-year guidance

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.

Dividend delight

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 MarchInterim (p)Final (p)Full year (p)
2011 (paid)2.856.058.90
2012 (interim declared; final forecast)3.056.479.52
2013 (forecast)3.266.9210.18

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?

More from G A Chester:

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M0byDick 09 Nov 2011 , 12:11am

Verizon and Vodafone are supposed to have been getting more on to the same wavelength lately. Hmm ...

'Lowell McAdam, Verizon Communications’ new chief executive: "There is not an ongoing [dividend] policy ... We’re going to look at it [the dividend] every year and we’ll decide as we go along.”' (FT)

'Although the cash from Verizon Wireless is not listed as a recurring dividend, Vodafone is advising that a similar payment is likely to come next year.' (Guardian)

:O MobyDick (G A Chester - article author)

ANuvver 09 Nov 2011 , 1:50am

Well, I'd certainly go with the FT over the Groiniad, who only maintain a City Desk reluctantly - doesn't fit with the hessian and polenta politics to have the paper seen to be serious about investment, you see. Far more interested in wallcharts of Stephen Fry's favourite pseudo-classical metaphors...

The February special to VOD shareholders was always intended to be a one-off, and plays the nicest kind of merry hell with yield forecasting. This isn't really news - they always were going to "decide as we go along".

What will be interesting is how VOD's leverage will play out on how VZN justify their capex strategy from now on. It's a culture clash, in a way. US blue chips tend to be more focused on growth than dividends, for any number of reasons. VZN has to operate within that mindset, so the "we'll see for now" policy is hardly surprising.

But however the relationship plays out, I'm a happy holder. Yet another example of a FTSE-listed biggun that lets you play abroad. The next time some kid from Bumf**k Alabama "lol"s his friends, I know I own a chunk of a company that has a big stake in the company he has to pay to do it!

Badgerd 09 Nov 2011 , 8:27am

Recent personal experience with Vodafone UK Customer Services - reinforced by anecdotal evidence from elsewhere - suggest that Voda is competitive here on price and coverage and little else. Perhaps that's all it needs to be … but I see a vulnerability here. In spite of the numbers, I now don't want anything to do with them either as an investor or as a customer.

It's a competitive market out there, and price is a BIG factor - witness the very heavily discounted deals Voda are offering in the marketplace. But like with cheap car insurance the margins have to be recovered elsewhere. For me as a customer Voda has passed a limit and I fear that with continuing pressure on margins they have the potential to alienate a far larger customer base than one grumpy old(ish) Badgerd. Mobile customers are largely tariff tarts, but this same lack of loyalty makes it easy to cross a supplier off the list if their standards become unacceptably low. And once off, you have to do a VERY deep loss-leader to ever be considered again. Vicious circle.

A real risk to be taken into account when making long-term investment decisions, anyway. Personal annoyances aside, I'd still be wary.

wokingblade 09 Nov 2011 , 1:16pm

"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"

I'm a simple soul, but if profits are ahead of expectations, how can EPS only be in line unless there is some mis-calculation of the effect of buy backs (or an incosnsistent set of expectations).

Can any wiser Fools enlightem me?


Tykethat 09 Nov 2011 , 1:17pm

Hi Mobydick,

The answer to your title question is "no"

Kind regards


jackdaww 09 Nov 2011 , 2:07pm

re customer service -

vodafone's may be an issue - i dont know.

i have had dreadful service from O2 - see which? conversation website.

orange also seems to get a very bad press.

whoever improves quickest should do well.

GolfingTaz 09 Nov 2011 , 2:17pm

re Customer service:

deviating from the topic a touch, I am currently with Virgin Mobile and the customer service is excellent. My biggest issue with all phone providers though is contract length.

I am not going to pay through the nose for a new tariff to get a new phone only to be locked in for 24months, when I know very well my phone will be old in one and broken by 18months!

I am on a SIM only rolling 30day contract which is fantastic value.

alexdz123 09 Nov 2011 , 2:36pm

No one has mentioned the future spectrum auction or the failure to properly monitise the rising demands for data.

I think the spectrum auction won't cost anywhere near as much as the last 3G auction, but it will represent a huge loss on the balance sheet. In terms of payback, no provider has been able to properly monitise data use yet but all are facing capacity problems in high-density areas.

The time frame of this auction was expected to be Spring 2012, so the joy of recieving a special dividend might be tempered by VOD's costs of bidding for new bandwidth.

Just a thought.

pickepics 09 Nov 2011 , 8:35pm

I too am absolutely sick of Vod's customer "care" but had an even worse experience when with O2 and have heard the others are as bad and don't have the coverage to boot. This is an oligopolistic market and it is high time the competition authorities exercised their authority.

But that's not the point here. We're talking about value investments not the way the licence holders treat their UK customers. Where Vod is scoring highly is in developing markets where they are able to protect their presence by monopoly power. This is because a good part of their deals involve infrastructure. They are able to negotiate preferential deals at government level and have the financial muscle to deliver.

I don't like 'em but I won't be selling for a good while yet.

ktaylor1 10 Nov 2011 , 12:25pm

Excellent point Floorlord - customer service experience will depend on individual views - with O2 I have had good experiences (sorry abourt your experiences) but their results from Africa middle east and asia look promising for the near future.

johandesilva 15 Nov 2011 , 4:23pm

As a VOD share holder why would I want us to invest in customer services?

The answer to the question "Is there a better dividend stock in the UK market?" is yes RSA in it?

ANuvver 16 Nov 2011 , 8:03pm

If anyone's still here, right clattering on going ex-div!

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