Vodafone (LSE: VOD) and National Grid (LSE: NG) both released half-year results this week that were ahead of expectations. Vodafones shares rose 3.9% on the day and National Grids shares were up 1.5%.
Are these popular FTSE 100 blue chips good buys today? And which is the better pick?
The draw of dividends
Dividends have long been the big draw for investors in Vodafone and National Grid, a fact recognised by the companies themselves. National Grid says its dividend is an important part of shareholder returns, while Vodafone goes further still, saying the board considers the dividend to be the core element of returns.
Both companies have progressive dividend policies. National Grid is committed to growing its dividend at least in line with the rate of average RPI inflation each year for the foreseeable future, while Vodafone is committed to annual, but unquantified, dividend increases.
In this weeks half-year results, National Grid and Vodafone lifted their interim dividends, by 2.0% and 2.2%, respectively.
National Grids trailing 12-month payout now stands at 43.16p, giving a yield of 4.7% at a share price of 913p. Vodafones trailing 12-month payout is 11.3p, giving a slightly higher yield of 5.0% at a share price of 226p. Both companies yields are attractive, though, relative to 3.9% for the FTSE 100 as a whole.
So, based on yield alone, National Grid and Vodafone could be good buys today, with the latters slightly higher yield just giving it the edge. However, we should also look at the affordability and sustainability of the dividends.
National Grids dividend payout for the last 12 months was covered 1.46 times by earnings per share (EPS) of 63.1p, which is a healthy level of cover for a regulated utility.
In contrast, Vodafones dividend was not covered by EPS of 5.43p; in fact, it was not even half-covered, being just 0.48. Furthermore, on a hard cash basis, the dividend was entirely uncovered, because free cash flow, after licence and spectrum payments, was negative.
At the half-year end, Vodafones net debt stood at 28.9bn, up from 21.8bn 12 months ago. Net debt is actually higher now than it was before Vodafone sold its 84bn stake in Verizon Wireless.
Based on current earnings and cash flows, then, National Grids dividend is affordable, while Vodafones is not. But what of the future?
Vodafone is currently engaged in a massive 19bn two-year investment programme. As such, when capex returns to more normal (lower) levels, free cash flow will improve. Whether this will cover a high and annually increasing dividend will depend on a number of factors that arent entirely certain.
The level of ongoing maintenance capex required, and investment in licences and spectrum, are some of the factors that come into the equation, but perhaps the biggest single uncertainty arises from Vodafones huge exposure to Europe. Economic recovery on the Continent or, conversely, a slip back into recession or a eurozone crisis could have a major positive or negative impact on Vodafones dividend prospects.
Meanwhile, the UK and US economies in which National Grid operates appear considerably less precarious.
Which is the better buy?
The current lack of visibility for Vodafone, combined with the fact that the mobile, home phone, broadband and pay-TV markets are intensely competitive, leads me to believe that National Grid is the better buy. National Grid benefits from the visibility that comes with being a regulated utility and a quasi-monopoly, and I dont think Vodafones 0.3% higher yield is sufficient compensation for the higher risk facing the telecoms firm.
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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.