Vodacom Group's (JSE:VOD) Shareholders Will Receive A Smaller Dividend Than Last Year

Vodacom Group Limited's (JSE:VOD) dividend is being reduced by 10% to ZAR3.05 per share on 4th of December, in comparison to last year's comparable payment of ZAR3.40. This means the annual payment is 6.4% of the current stock price, which is above the average for the industry.

See our latest analysis for Vodacom Group

Vodacom Group Is Paying Out More Than It Is Earning

If the payments aren't sustainable, a high yield for a few years won't matter that much. However, prior to this announcement, Vodacom Group's dividend was comfortably covered by both cash flow and earnings. This means that most of what the business earns is being used to help it grow.

EPS is set to fall by 30.0% over the next 12 months. If the dividend continues along recent trends, we estimate the payout ratio could reach 100%, which could put the dividend in jeopardy if the company's earnings don't improve.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2013, the annual payment back then was ZAR7.85, compared to the most recent full-year payment of ZAR6.70. This works out to be a decline of approximately 1.6% per year over that time. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

Dividend Growth May Be Hard To Achieve

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Although it's important to note that Vodacom Group's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time. If Vodacom Group is struggling to find viable investments, it always has the option to increase its payout ratio to pay more to shareholders.

An additional note is that the company has been raising capital by issuing stock equal to 14% of shares outstanding in the last 12 months. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

In Summary

Overall, while it's not great to see that the dividend has been cut, we think the company is now in a good position to make consistent payments going into the future. The dividend has been at reasonable levels historically, but that hasn't translated into a consistent payment. This looks like it could be a good dividend stock going forward, but we would note that the payout ratio has been at higher levels in the past so it could happen again.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 3 warning signs for Vodacom Group that investors should know about before committing capital to this stock. Is Vodacom Group not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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