There is no doubt about it, Vodafone (LSE: VOD) (NASDAQ: VOD.US) is a FTSE 100 dividend champion. Indeed, during the past few years, Vodafone alone has paid out more than 10% of all FTSE 100 dividends, making the company’s shares a staple holding within any income portfolio.
However, Vodafone has become increasingly reliant upon its share of Verizon Wireless to bolster cash flows and support the company’s dividend payout in recent years. Unfortunately, as Vodafone has now sold off its share of Verizon, the company’s income and possibly dividend payouts could come under pressure as a result.
Crunching numbers
The best way to highlight how reliant Vodafone has become on its income from Verizon during the past few years is to take a look at the company’s income statement.
| 2011 | 2012 | 2013 | |
|---|---|---|---|
| Income from Verizon | £5.1bn | £4.9bn | £6.5bn |
| Operating excluding Verizon income | -£2bn | £6bn | £0.4bn |
| Total dividends paid | £4.5bn | £6.6bn | £4.8bn |
As the table shows, every year for the past three, Vodafone has paid out more in dividends than the company’s operating profit, excluding income from Verizon. That being said, the total ‘dividends paid’ figure includes special dividends paid from a portion of the Verizon income, which are likely to stop.
Nevertheless, during 2011 and 2013 it is unlikely that Vodafone would have been able to pay any sort of dividend without additional income from Verizon. Further, Vodafone will require additional cash to upgrade and maintain its mobile network, if the company is paying out all profits in dividends then management will have to borrow to fund capital spending. All in all, these are some worrying numbers as they imply that Vodafone’s dividend payout is unsustainable.
What about acquisitions?
Still, now flush with cash from the sale of its holding in Verizon, Vodafone has gone on an acquisition spree to try and fill the void left by its share of the North American carrier. However, it remains to be seen if Vodafone’s recent acquisitions will make a noticeable impact to the company’s bottom line.
For example, Vodafone’s acquisition of Spain’s Ono, announced only this week, cost the company £6bn, although Ono reported a net loss of €25m for 2013, down from a small profit of €52m during 2012. Earnings of €52m on an investment of £6bn is an unimpressive return on investment of less than 1%. What’s more, Vodafone’s other big European acquisition, Kabel Deutschland only reported a net profit of €250m for 2012.
So combined, these two investments are likely to yield income of €300m per annum for Vodafone, hardly filling the void left by Verizon, which regularly provided over £4bn to Vodafone in the way of dividends.
Foolish summary
All in all, it would appear that Vodafone’s dividend payout could be cut in the near future as the company struggles to replace the income lost from its Verizon joint-venture.
