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The board of Vodacom Group Limited (JSE:VOD) has announced that the dividend on 26th of June will be reduced by 23% from last year's ZAR4.30 to ZAR3.30. The dividend yield of 7.0% is still a nice boost to shareholder returns, despite the cut.
Check out our latest analysis for Vodacom Group
Vodacom Group's Payment Has Solid Earnings Coverage
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, Vodacom Group's was paying out quite a large proportion of earnings and 93% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.
Over the next year, EPS is forecast to expand by 8.9%. Under the assumption that the dividend will continue along recent trends, we think the payout ratio could be 73% which would be quite comfortable going to take the dividend forward.
Vodacom Group Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was ZAR7.10 in 2013, and the most recent fiscal year payment was ZAR7.70. Dividend payments have been growing, but very slowly over the period. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Vodacom Group May Find It Hard To Grow The Dividend
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. However, initial appearances might be deceiving. However, Vodacom Group's EPS was effectively flat over the past five years, which could stop the company from paying more every year.
We should note that Vodacom Group has issued stock equal to 14% of shares outstanding. Regularly doing this can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.
In Summary
In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While the current distribution levels might be a bit unsustainable, we can't deny that until now it has been very stable. We would probably look elsewhere for an income investment.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 3 warning signs for Vodacom Group that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.