How Vodafone Group Plc (ADR) (VOD) Will Deliver Its Dividend

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LONDON — I’m looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.

Today, I’m putting telecommunications giant Vodafone Group Plc (ADR) (LSE:VOD) (NASDAQ:VOD) under the microscope.

Current dividend policy
Vodafone Group Plc (ADR) (NASDAQ:VOD) unveiled a new dividend policy when it announced its annual results this week: “The Board … going forward aims at least to maintain the ordinary dividend per share at current levels.”

Vodafone Group Plc (ADR) (NASDAQ:VOD)’s dividend for its financial year ended March 2013 is 10.19 pence a share. Therefore, investors can hope for a minimum of 10.19 pence a share (and perhaps more) “going forward” — though how far forward the company doesn’t tell us.

Vodafone Group Plc (ADR) (VOD)Past dividend policy
How well has Vodafone Group Plc (ADR) (NASDAQ:VOD) delivered on its dividend policy in the past? Let me begin by saying that the group is one of just a handful of FTSE 100 companies to have provided shareholders with an above-inflation dividend increase each and every year since the turn of the millennium.

Vodafone Group Plc (ADR) (NASDAQ:VOD)’s dividend policy for 2010/11, 2011/12 and 2012/13 was: “A dividend per share growth target of at least 7% per annum for each of these financial years.”

At the time the policy was set, the Board said it expected the dividend for the year ended March 2013 to be “no less than 10.18 pence per share.” Therefore, Vodafone Group Plc (ADR) (NASDAQ:VOD) delivered on the policy with its 10.19 pence payout.

However, we can note that the old policy was to deliver “at least” 7% annual growth, but that the company didn’t in the event deliver more than 7%. We can also note the similarity of the wording within the new policy; namely, to “at least” maintain the dividend at the current level.

The means of delivery
Vodafone Group Plc (ADR) (NASDAQ:VOD) set its three-year dividend policy in 2010 on the basis of projections for its free cash flow — the excess cash a company generates. The company expected free cash flow of 6 billion pounds to 7 billion pounds a year. The table below shows how things panned out.

Metric 2010/11 2011/12 2012/13
Free cash flow (billions of pounds) 7.0 6.1 5.6
Ordinary dividends paid (billions of pounds) 4.5 4.6 4.8

As you can see, free cash flow has been falling and the dividend payout rising to meet it. The two will converge in 2013/14 based on Vodafone’s free cash flow projection for the year of 4.9 billion pounds. Increasingly, then, Vodafone is struggling to pay its dividend from free cash flow.

However, the cash flow figures in the table above do not include payouts that Vodafone has been receiving from U.S. firm Verizon Wireless, in which it has a 45% stake: 2.7 billion pounds in 2011/12, 2.4 billion pounds last year, and 2.1 billion pounds due next month.

The problem, though, is that while Vodafone Group Plc (ADR) (NASDAQ:VOD) is becoming increasingly dependent on the cash from Wireless, it has no control over the U.S. firm’s payout policy. Furthermore, Wireless’ majority owner, Verizon Communications Inc. (NYSE:VZ), is keen to get its hands on Vodafone’s stake and has made veiled threats to put a halt to Wireless’s distributions.

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