FTSE 100 telecoms firm Vodafone Group (LSE: VOD) has cut its dividend. Read on and Ill reveal what Id do with the share now.
This is what happened
In the full-year results report delivered on 14 May, the directors announced a total dividend for the year of nine eurocents per share, implying a final dividend per share of 4.16 eurocents. However, last year, the total dividend was 15 eurocents, so the dividend is down by 40% ouch!
But could you have seen it coming? I believe so. Vodafones share price had been falling since December 2017 and is now around 45% lower than it was then. Id previously believed that the firm had been over-valued, but the sinking share price pushed the anticipated dividend yield up to more than 8%.
I reckon the stock market is often smarter than we give it credit for. A prolonged plunge in any firms share price prompts me to ask why. On top of that, any dividend yield above 7% or so should be closely examined, and I did just that inanarticle at the beginning of April headlined, Is Vodafones 8%-plus dividend yield safe?
Flat financial figures
I looked at Vodafones financial record and concluded that over the previous five years, cash flow and net debt had been stable, but the dividend had been flat over the period. I argued that it would take moderately rising cash flow each year to support an advancing dividend.
Vodafone failed a fundamental test that I have for a dividend-led investment that cash flow, earnings and the dividend rise a little each year. I ended the article by saying, one possibility is that the fat dividend could receive a haircut! So, Im staying away from the shares and consider the firms dividend to be unsafe at its present level.
There was enough evidence for me to avoid Vodafone shares even though I didnt know for certain that a dividend cut was coming. But thats about as accurate as we can be with the process of investing, given that private investors are not privy to inside information its a bit like trying to thread a needle with boxing gloves on.
This is what Id do now
Tuesdays report revealed an inflow of cash from operating activities of 12,980m and an outflow of cash for investing activities of 9,217m. In the prior year, the proportions were similar, which suggests that Vodafones is a capital-intensive business. Constant reinvestment into its networks and technologies seems to be normal, but does that investment score Vodafone any advantage that could move earnings up in the future, or is it a race just to keep up and not be left behind? Theres nothing in the financial record to suggest that Vodafone is gaining ground on earnings, so my opinion about the firm as an investment remains unchanged and Im avoiding the shares.