LONDON -- I'm looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.
Today, I'm putting telecommunications giant Vodafone Group (LSE: VOD ) (NASDAQ: VOD ) under the microscope.
Current dividend policy
Vodafone unveiled a new dividend policy when it announced its annual results this week: "The Board ... going forward aims at least to maintain the ordinary dividend per share at current levels."
Vodafone's dividend for its financial year ended March 2013 is 10.19 pence a share. Therefore, investors can hope for a minimum of 10.19 pence a share (and perhaps more) "going forward" -- though how far forward the company doesn't tell us.
Past dividend policy
How well has Vodafone delivered on its dividend policy in the past? Let me begin by saying that the group is one of just a handful of FTSE 100 companies to have provided shareholders with an above-inflation dividend increase each and every year since the turn of the millennium.
Vodafone's dividend policy for 2010/11, 2011/12 and 2012/13 was: "A dividend per share growth target of at least 7% per annum for each of these financial years."
At the time the policy was set, the Board said it expected the dividend for the year ended March 2013 to be "no less than 10.18 pence per share." Therefore, Vodafone delivered on the policy with its 10.19 pence payout.
However, we can note that the old policy was to deliver "at least" 7% annual growth, but that the company didn't in the event deliver more than 7%. We can also note the similarity of the wording within the new policy; namely, to "at least" maintain the dividend at the current level.
The means of delivery
Vodafone set its three-year dividend policy in 2010 on the basis of projections for its free cash flow -- the excess cash a company generates. The company expected free cash flow of 6 billion pounds to 7 billion pounds a year. The table below shows how things panned out.
| Free cash flow (billions of pounds) | 7.0 | 6.1 | 5.6 |
| Ordinary dividends paid (billions of pounds) | 4.5 | 4.6 | 4.8 |
As you can see, free cash flow has been falling and the dividend payout rising to meet it. The two will converge in 2013/14 based on Vodafone's free cash flow projection for the year of 4.9 billion pounds. Increasingly, then, Vodafone is struggling to pay its dividend from free cash flow.
However, the cash flow figures in the table above do not include payouts that Vodafone has been receiving from U.S. firm Verizon Wireless, in which it has a 45% stake: 2.7 billion pounds in 2011/12, 2.4 billion pounds last year, and 2.1 billion pounds due next month.
The problem, though, is that while Vodafone is becoming increasingly dependent on the cash from Wireless, it has no control over the U.S. firm's payout policy. Furthermore, Wireless' majority owner, Verizon Communications, is keen to get its hands on Vodafone's stake and has made veiled threats to put a halt to Wireless's distributions.
Summing up
Vodafone's new dividend policy is considerably more cautious than its previous policy, but this is not surprising given the prevailing cash flow situation. At the moment, I find it difficult to see Vodafone increasing its dividend in the coming year -- and, in theory, holding the dividend at the current level indefinitely would constitute a successful delivery of the policy!
At the time of writing, Vodafone's shares are trading at 197 pence. Therefore, a 10.19 pence dividend offers anyone investing in the company today a 5.2% starting income, which is well above the interest you can earn on cash. However, we should note that if Vodafone fails to increase the dividend, or only delivers increases below the level of inflation, the real value of that starting income would be eroded.
There are other companies around, offering a similar high yield to Vodafone, but with policies of increasing their dividend at least in line with inflation.
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