The Vodafone (LSE: VOD) share price perked up on full-year results Tuesday morning (20 May), but quickly fell back.
CEO Margherita Della Valle said: “Since I set out my plans to transform Vodafone two years ago, Vodafone has changed.” Part of that change has been dividends.
The 2025 fiscal year ended 31 March is the first under a new rebased dividend policy. The annual dividend has been cut in half, with 45 eurocents (38p) per share announced as planned. It represents a dividend yield of 5.2%, which is still pretty respectable.
Cash rich?
Vodafone also launched a new share buyback worth up to €500m. Along with the latest report telling us of “a strong balance sheet,” it might reassure shareholders that further threats to the dividend are not a concern. And it could boost confidence in progressive annual payment growth resuming as predicted.
Speaking of the balance sheet, net debt fell by €10.8bn from €33.2bn at 31 March 2024. That’s a healthy-sounding 33%. But it still leaves the total at €22.4bn (£18.9bn), slighly higher than Vodafone’s market cap of £18.4bn.
What’s more, the fall in debt didn’t come from a big boost in operational cash flow. It was driven mainly by the disposal of Vodafone Spain, Vodafone Italy and the firm’s 10% stake in Oak Holdings.
Company performance
Total shareholder returns reached €3.7bn in the year, which has to be good for income investors. But I want to know if levels like that will be sustainable from operating profit and cash in the coming years. And I think that question has to remain unanswered for now.
Revenue rose by just 2%. And organic adjusted EBITDAaL (a non-standard alternative to EBITDA which omits lease expenses) gained only 2.5%. That’s still positive, but I’m always wary of measures that are qualified by words like ‘organic’ and ‘adjusted‘.
The company still reported an operating loss. It was just €0.4bn after €4.5bn in non-cash impairment charges for Germany and Romania. But I’d say it means it could still be too soon to celebrate Vodafone’s successful turnaround.
Adjusted free cash flow came in at €2.5bn. So there’s still some way to go here if Vodafone is to fund future shareholder returns at 2025 levels from cash generated within the business.
Dividend outlook
I might sound a bit pessimistic here. But to contrast that, I do think I’m seeing improved confidence in future dividend prospects. In this update, the company said: “Whilst we still have much more to do to reach the full potential of our businesses, we are now entering a phase of medium-term, sustainable adjusted free cash flow growth.“
Guidance for FY2026 puts adjusted EBITDAaL between €11.0bn and €11.3bn, with adjusted free cash flow at €2.6bn to €2.8bn. On that basis, I see a good argument for just taking the dividends and not worrying about the rest. I’ll stay away myself though, because I don’t like the potential risk from carrying high debt.
