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Vodafone (LSE: VOD) is a popular income stock. That’s because the company has a history of paying out big dividends. Is the telecoms company set to continue rewarding investors with large payouts? Let’s take a look at the Vodafone dividend forecast for 2023 and 2024.
Dividend forecasts
Before I look at the latest income estimates, there are a couple of things to note.
First, Vodafone’s financial year ends on 31 March. So, the year ending 31 March 2023 is FY2023 while the year ending 31 March 2024 is FY2024.
Second, the company reports its financials (and declares its dividends) in euros. So, we need to convert the expected dividends back to pounds to obtain the yield.
As for the dividend forecasts, for FY2023 analysts expect Vodafone to pay out nine euro cents per share (the same payout as the last four financial years). That equates to a yield of around 8.7% at today’s share price.
For FY2024, analysts expect a slightly lower payout of 8.7 euro cents per share. That translates to a yield of around 8.4% at today’s share price.
So, at first glance, Vodafone shares look like they could be a bit of a cash cow, even if a small cut is forecast for FY2024. In today’s economic environment, an 8%+ yield is certainly attractive.
Is Vodafone’s payout sustainable?
When investing for dividends, however, it’s always worth checking the dividend coverage ratio. This is the ratio of earnings to dividends and it provides insights into how sustainable a company’s payout is.
For Vodafone, the ratio is just 1.16 for FY2023 and 1.14 for FY2024. These ratios are very low (indicating that the dividend may be at risk of a larger cut). Generally speaking, a ratio of two or above is desirable.
Buying a stock for its dividend when coverage is that low is quite risky, to my mind. Because returns may be lower than expected.
Dividend red flags
Digging deeper, the low dividend coverage ratio is not the only red flag here.
Another is the fact that Vodafone has paid out nine cents per share for the last four financial years. In other words, there has been no dividend growth at all for years now. Often, this pattern is observed before a cut.
An additional red flag is the amount of debt on Vodafone’s balance sheet. At 30 September, net debt stood at €46bn. The interest payments on this debt could potentially have an impact on dividends going forward.
Worth buying for income?
Given the low level of dividend coverage, the lack of dividend growth, and the amount of debt on the balance sheet, this isn’t a stock I would personally buy for income. To my mind, the risks of a substantial dividend cut are too high.
All things considered, I think there are safer dividend stocks for investors to buy today.
