FTSE-100 telco Vodafone just revised down its full-year guidance and cash flow forecasts, warning that worsening global macroeconomic conditions, rising energy costs and increased inflation has punctured its financial performance.
But that hasn’t stopped Vodafone from being one of the top-paying income stocks of 2022.
Another 4.5c interim dividend was announced in Tuesday’s earnings call, bringing full-year dividend obligations to 9c; not bad for a company whose revenues show little sign of growth, if forecasts by equities analysts are anything to go by.
As a result of Vodafone’s tepid earnings call, VOD shares dipped 7% on Tuesday, causing yields to rise to nearly 8%.
These market-leading figures are surely enticing for investors, but the risks associated with VOD shouldn’t be ignored.
Without getting too deep into forward speculation, Vodafone’s free cash flow for the year could struggle to cover said dividends.
To maintain this impressive income flow for shareholders, Vodafone will need to add to its imposing debt pile, which currently stands at a whopping €45.5bn, far exceeding the company’s €30bn market value.
Vodafone’s sale of Vantage Masts and merger proposal with Three UK were seen as attempts to reduce its imposing debt position, but regardless of intentions, Vodafone’s debt position actually increased nearly 3% year on year.
How does Vodafone intends to chip away at this pile, in a macro environment of rising rates and little chance of growth in the telecoms sector?
That’s the multibillion-dollar question for chief executive Nick Read.
“A share price that is unchanged since 1998 is unlikely to be a good sign and for all of his efforts with disposals, mergers and spin-offs, chief executive Nick Read is struggling to get a tune out of Vodafone,” said AJ Bell investment director Russ Mould.