Vodafone to increase its dividend for some time?
Companies Results Summaries

November 14, 2012

The businesses that Vodafone control generate more than enough for Vodafone to increase its dividend – even without Verizon Wireless’ special dividends.

But what about the recently announced results . . .

In earlier articles about Vodafone, published here last week, and earlier in October, here, I elaborated on the changing character of Vodafone’s dividends going forward. Last week’s results do not alter my views on this.

Recap of Vodafone’s results

Vodafone announced a 7.2 per cent increase in interim dividends and plans for a £1.5bn share buyback. The 3.27 pence dividend is costing the group some £3.2bn drawn from underlining earnings which were down 3 per cent at £6.6bn – representing a pay-out ratio of 48.5%, or, a comfortable dividend cover of 2.

The announced £1.5bn share buyback will be financed by the £2.4bn dividend payment from Wireless Verzon, but only once they have received the cash ‘somewhere’ on or before 31 December 2012.

Question is what is Vodafone going to do with the remaining £0.9bn – perhaps they will announce a surprise ‘special dividend in 2013?

As a 45 percent minority shareholder Vodafone has no control about if and when Verizon Wireless pays any dividends – some people have even proclaimed that Vodafone has now become over-dependent on Verizon Wireless results – but, please, lets keep some perspective here. The businesses that Vodafone do control still generate more than enough to meet even minimal increases in its core dividend for some time to come.

In fact, with net debts currently at approximately 1.8 times underlying earnings Vodafone could easily continue with its 7 percent increases in its dividends for several years, with the group receiving an occasional special dividend from Verizon Wireless which it (partially or in whole) may ‘transfer’ to its shareholders in the form of more share cashbacks or indeed as hard cash returned to all shareholders in the form of an ‘extra’ dividend.

The question is, is Vodafone a ‘buy’ at share price levels around £1.60?

Are Vodafone’s shares currently historically undervalued?

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Company results and dividends

Several other dividend paying companies released interim results, including:

First Group

First Group released half year figures to 30 September with underlying earnings per share down a massive 36 percent whilst net debt has risen slightly to £2.082bn. Worryingly gearing worsened during the period and is now a ‘utility-like’ 293 percent against 255 percent at the same time last year.

While trains and buses are essential services to the public, companies operating in this sector are not similar to ‘pure’ utilities as gas or electricity utilities; for one First Group has to bid for and secure long-term contracts to ran bus routes and train lines. The loss of one or more can have a detrimental effect on the bottom line.

First Group has decided to hold the dividend because of the farce over the West Coast rail line franchise bid which the group won initially, following which the whole process was withdrawn. The un-changed dividend of 7.62 pence is going ex-dividend on 9 January and payable on 07 February.

They also announced that it will review its dividend policy with the full year results in May next year once First Group’s rail prospects with regards the West Coast and other lines will have become somewhat clearer.

Land Securities

Land Securities released half year figures to September. The second quarter dividend is 7.4 pence going ex-dividend on 5 December with payment on 10 January.

This makes a total payout for the half year of 14.8 pence against 14.4 pence last year, a below inflation rise of 2.8 percent.

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