Just how large will future dividends from Vodafone be?
Representing about 6% of the FTSE 100, Vodafone (LSE: VOD) is one of the biggest and best dividend payers in the blue-chip index -- and that payout is growing at an impressive rate. Throw in special dividends, and Vodafone could be the best income opportunity in years.
For 2011, shareholders received 8.90p per share from Vodafone. For the year ending March 2012, this figure rocketed to a massive 13.52p.
There are two reasons for this large rise. The first is growth in Vodafone's ordinary dividend. The second is a 4p special dividend for 2012.
For 2010, Vodafone's dividend was 8.31p per share. Around that time, the company announced its intention to grow the payout by 7% per annum for the next three years. If Vodafone can meet this target for 2013 (Vodafone has a March year-end, so we are in Vodafone's 2013 now), then the ordinary part of the dividend would hit 10.2p per share. At today's share price, that alone is nearly a 6% yield.
The kicker here is the possibility that the additional 4p special dividend may be repeated.
The special dividend came from Verizon Wireless (NYSE: VZW.US). VZW is a US mobile network operator formed as a joint venture between Vodafone and Verizon Communications. Vodafone has 45% of VZW and Verizon Communications owns the rest.
Verizon holds the key
Until recently, VZW had been using the cashflows in its business to finance acquisitions and investment. This changed last year when VZW announced it would pay its owners a dividend. Vodafone's share of this amounted to £2.8bn for 2012. Vodafone then used the VZW dividend to pay its own shareholders a £2bn special dividend.
Vodafone is the junior partner in VZW. Verizon Communications decides whether VZW pays a dividend or not. To ascertain the future income stream Vodafone represents, investors must get a measure of the probability and magnitude of dividends from VZW.
I spoke with Tom Gidley-Kitchin, the Vodafone analyst at stockbroker Charles Stanley. Tom researches Vodafone and its industry day-in, day-out. So how does he assess the dividend situation at Vodafone? Tom says:
"While Vodafone has committed to increasing its ordinary dividend by 7% per annum next year, there is no such public commitment from VZW to its shareholders.
"VZW is producing more than $1bn of free cash per month. Unless VZW spends this money on acquisitions, I envisage continued dividend payments to Vodafone."
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VZW has a net cash position. The company is also enjoying large revenue growth. Consensus estimates of Vodafone's future dividends reveal a number of analysts are expecting special dividends to be paid during the next two years.
If VZW pay Vodafone again in 2012, the dividend to Vodafone shareholders could hit 14.2p (10.2p ordinary dividend, 4p special). At today's price, that's a massive 8.4% yield. Normally when a company is paying that level of dividend there are concerns on its sustainability. Of course, VZW might not pay out. Even in this scenario, however, Vodafone could still pay the normal 10.2p dividend.
Currently, it feels like investors are looking at Vodafone in a 'glass half-empty' mood. More bullish investors might think that, just as Vodafone has increased its normal dividend to shareholders, it might be possible for VZW to increase its dividend to Vodafone as well.
(No doubt the effect of VZW has crossed the mind of City dividend legend Neil Woodford, who counts Vodafone as one his largest income holdings. You can read more about Neil Woodford's market-beating dividend portfolio in this free report: "8 Shares Held By Britain's Super Investor")
Vodafone is a dominant player in its markets. This position brings high visibility of earnings, something investors usually pay a premium for. With the normal dividend already substantial and the possibility of more special dividends, Vodafone looks the best large-cap income opportunity I can recall in a long time.
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> David does not own shares in any of the companies mentioned here.