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This FTSE 100 stocks certainly seem to be something to call home. After all, it offers a dividend yield that is more than double the 4.1% the index paid in 2022.
The company in question is vodafone (LSE:VOD). Its stock price has plunged 33% over the past year, sending its dividend yield skyrocketing more than a wire.
Should I charge Vodafone shares at this price? Or has Mr Market been punishing the telecom giant for a good reason?
lethargic forecasts of growth
Vodafone is without a doubt No a high growth outlook. Analysts estimate the company’s revenue will grow at a slow 0.5% per year. That’s based on a line drawn through the guesses of 19 forecasters about Vodafone’s earnings trajectory, compiled by software company Simply Wall Street.
Worryingly, that leaves Vodafone lagging behind the UK market, which is forecast to see revenue growth of 4.3% a year.
Meanwhile, the European wireless telecommunications sector is expected to increase its revenue by 1.7% per year. That means Vodafone’s share of the telecom pie is expected to decline in the coming years.
Vodafone’s FY23 Q3 business update showed a slowdown in revenue growth. In the second quarter, the group’s revenue had grown year-on-year by 2.5%, in the third quarter it slowed to 1.8%. Even that 1.8% figure was too generous: it included a 52.9% revenue increase in inflation-ravaged Turkey. Excluding the Turkish anomaly, revenue grew just 0.5% in the third quarter.
The company explained that its slow growth was partly due to the EU Telecommunications Law. As of July 1, 2022, regulations outside of Brussels prevented Vodafone from being able to charge travelers in the EU and EEA additional charges for calls, text messages and internet use outside their home countries. The ‘roaming like at home’ scheme will remain in place until 2032. Vodafone experienced third-quarter revenue growth in Europe that contracted by 1.1% compared to the previous year, partly due to this change.
On the bright side, third-quarter growth remained respectable in Africa at 3.5%, driven by higher data usage and good demand for financial services.
hold the line
Of course, if I’m looking for a high-dividend stock, I typically have to temper my expectations of wild growth. Dividend aristocrats, for example, tend to be slow and steady.
But I think Vodafone falls short even as equities. Its dividend payout has fallen in the last 10 years. To take a single data point, in 2012 shareholders earned 18 pence per share, but by 2022 that had fallen to 8 pence.
In other words, the increase in the dividend yield has been driven solely by a steady downward march of its stock price. This is not a story of increasing dividend payments.
And dividends could be cut again in the future. The payout rate is an unsustainable 123%, which means your earnings are not enough to make the payments. At the same time, Vodafone’s debt-to-equity ratio has skyrocketed from 63.4% to 114% in the last five years.
I will not add Vodafone shares to my portfolio, despite the impressive telecom infrastructure it has in 21 countries. The dividend payout seems unsustainable to me, and the company’s weak growth and mounting debt load set off alarm bells in my head.
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