Vodafone has wandered away from its UK roots in recent decades. Profits, now denominated in euros, depend mostly upon German and African telecom markets. Even so, the company remains a hefty dividend payer in the FTSE 100 and is important to UK pensioners.
Having cut its payout last year, markets were braced for more bad news in Tuesday’s full-year results. Instead, the operator announced that it was holding the dividend in an otherwise ho-hum year. In turbulent markets, boring is good.
After slashing its dividend by nearly half last year, Vodafone now offers one of the UK’s highest, sustainable yields at about 7 per cent. That is important when old dividend stalwarts such as Royal Dutch Shell and BT Group have cut payouts.
Vodafone shied away from offering any guidance on this year’s profits. But it does expect to generate more than €5bn in free cash flow. This should be enough to cover the dividend.
Profits for the last financial year were unremarkable. Dig deeper and there was some good news. Top-line growth, up 3.9 per cent, makes up for three years of declines. Ebitda margin, a key metric for operators given their high depreciation levels, rose by 120 basis points to 33.1 per cent. These are adjusted for last year’s purchase of Liberty Global’s German fixed-line business, as well as the sale of New Zealand operations.
In the past year Vodafone managed to cover its dividend after steep capital expenditure and net of acquisitions. It is the first time for five years. Worries about the payout contributed to the poor performance of its shares relative to the MSCI Europe Telecom benchmark this year. Keeping the payout obligation comfortably covered this year depends partly on avoiding big ego-driven acquisitions.
The share price rallied 8 per cent on Tuesday. Voda’s dividend gives yield investors something to hang on to in a world turned upside down. The existential challenge facing so many mature businesses will remain when the pandemic is over — a lack of reliably recurring growth.
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