Back in April, I remarked that I would continue to avoid buying shares in FTSE 100 communications giant Vodafone (LSE: LON:VOD) until the clearly unsustainable dividend was reduced to a more sensible level.
Last week, this came to pass with new-ish CEO Nick Read announcing that the £33bn cap and income favourite would be slashing its payout to a total of 9 euro cents per share (7.9p) from the 15.07 euro cents (13p) paid last year.
You can read more about Vodafone’s results for the year to the end of March in my Foolish colleague Harvey Jones’s piece from the day. So, will I now be piling in? Not yet.
Part of my reasoning behind this is simply because the stock hasn’t bounced as I thought it might.
Indeed, it would appear that many investors are continuing to dump the shares, perhaps more concerned by the fact that management believed only a few months ago that the dividend wouldn’t need to be cut, rather than by the eventual cut itself.
Certainly, this big U-turn doesn’t exactly inspire confidence and, in my opinion, devalues talk of adopting a progressive dividend policy from now on. Quite why Read — Vodafone’s former finance director — didn’t bite the bullet and elect to rebase it earlier this year still perplexes me.
What’s more, I’m not over-the-moon regarding the extent to which the company’s new dividend will be covered by profits.
Cover of roughly 1.3 times earnings is clearly a huge improvement on where it used to be, but I can’t help thinking the 6.4% yield might still not be completely safe if market conditions worsen.
News of a dividend cut may help in making Vodafone a slightly less risky buy but, with so much investment needed, so much debt on its books and such a competitive landscape (particularly in Spain and Italy), the share price needs to come down even further to really get me interested.
A tastier alternative An example of a dividend and growth stock I’m far more positive on would be FTSE 250 drinks giant Britvic (LSE: BVIC).
On the income side of things, the company has a long history of raising its cash payouts, albeit modestly.
This year, analysts are predicting a 4.5% increase to 29.5p per share, leaving the stock yielding 3.2%.
That’s clearly a lot less than Vodafone but, on the flip side, it is likely to be covered twice by profits. Moreover, dividend hikes are far more preferable to a supersized-but-stagnant yield, in my opinion. The former smacks of a company in rude health. The latter suggests an inevitable cut when the business cycle turns.
Britvic also trades on a little under 16 times earnings, despite having already performed very well indeed over the last year or so.
A dip in profit growth is expected this year, but things are expected to rebound in 2020, helping to bring an already-reasonable valuation even lower, to a P/E of 15.
That might not be as cheap as some other companies offering far higher yields, but its defensive qualities, strong brands (such as Robinsons, J2O and R Whites), consistently solid returns on capital employed and manageable debt levels make me far more likely to buy its shares.
Britvic releases half-year figures to the market next Wednesday. I’d be surprised if there were anything for investors to worry about.
Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019