Vodafone(LSE: VOD) (NASDAQ: VOD.US) is one of the FTSE 100s dividend stalwarts. Indeed, the company currently supports a dividend yield of 5.4%, significantlyabove the FTSE 100s dividend yieldof 3.6%.
However, as Vodafone struggles to grow, the companys dividend payout is coming under pressure and I believe that a 50% dividend cut could be on the cards.
Lack of growth
Its no secret that Vodafone is struggling to grow. The economic climate within the companys key European market continues to impact sales and Vodafone is investing billions to try and snatch customers back from peers.
Nevertheless, its going to be some time before Vodafones infrastructure investments start to pay off and until they do, Vodafones management is going to have to work hard to balance the books. With this in mind, it appears as if Vodafones dividend is under threat, as the company is currently paying out more than it can afford to investors.
Take a quick look at the numbers City analysts have pencilled in for Vodafone between now and 2016, and its easy to see that the company cannot cover its dividend payout. Specifically, analysts are expecting Vodafone to report earnings per share of 6.6p for the year ending March 2015, although the company is expected to pay a dividend of 11.3p per share.
Whats more, figures for 2016 are similar. Analysts expect Vodafone to report earnings per share of 6.8pfor the year ending March 2016, while paying out a dividend of 11.7p per share.
Unfortunately, Vodafones dividend payout cannot exceed earnings per share indefinitely and at some point, management will have to make the tough decision to slash the payout. But a dividend cut could be good news for investors.
Not all bad news
A dividend cut would not be the end of the world for Vodafones investors. Indeed, if the company were to slash the payout, Vodafone would have more cash available to pay down debt. Additionally, the company would be able to fund additional acquisitions, which would boost earnings growth.
Actually, a dividend cut could be the answer to Vodafones problems. With just over 26.4bn shares in issue, according to my calculations, this years dividend of 11.3p will cost the company approximately 3bn.
Cutting the payout by 50% could save 1.5bnper annum, enough to snap up several smaller peers and drive growth through bolt-on acquisitions. An additional 1.5bn in cash per year would also help Vodafone pay down its debt pile of 14.1bn, as reported at the end of June.
Still, even after a dividend cut, Vodafones defensive nature makes the companys shares a great long-term investment. Its also likely that the companys dividend will rise back to previous levels over time.
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