There are plenty of attractive dividend yields across the FTSE 100. One of the highest out there is telecoms powerhouse Vodafone (LSE: VOD), offering a huge 10.5%.
Let’s dig deeper to help me decide if I should buy some shares for juicy returns.
What’s happening?
At present, Vodafone shares are trading for 74p, compared to 72p at this time last year. A modest 2% increase isn’t much to shout about, in my view.
There’s been lots happening in the background that has prompted the roller-coaster journey displayed above. Some noteworthy events include the cutting of the dividend from FY25, as well as challenging trading environments in established markets such as Germany and here at home in the UK. On the other side of the coin, share buybacks and progress in growth markets have been some bright spots.
In Vodafone’s most recent trading update, it provided me with a snapshot as to the status quo of the business.
Organic service revenue grew by 5.4% overall compared to the same period last year. This was mainly driven by success in growth markets such as Africa and Turkey. Margin levels held steady at close to 30%. These highlights show me a certain amount of resilience.
Next, Vodafone Business, another growth area, performed well. It reported growth of service revenue of just under 3%.
However, the bad news was that established markets saw service revenue decline by 1.5% in Germany, and remain stagnant here in the UK. The other issue for me was the amount of debt the firm continues to deal with. This could hurt returns in the future even more than the recent announcement of cuts to come.
My investment case
From a bearish view, the fact that debt levels are hurting Vodafone’s balance sheet are a worry. Plus, the dividend is already set to be cut.
In addition to this, performance in its established markets, where it makes most of its money, is a concern too as performance seems to be stagnating.
Finally, the shares look a tad expensive on the surface of things on a price-to-earnings ratio of 18.
Moving to the other side of the coin, growth markets and potential opportunities here are exciting. Recent updates show this, including the latest one. The propensity for earnings and returns to grow from these emerging territories indicate to me that returns could move back to levels seen previously. Furthermore, another positive sign is the share buyback scheme the business recently announced too.
Finally, it’s hard to ignore Vodafone’s pivotal market position in the telecoms ecosystem across the planet. With its wide presence, previous track record, and know-how, it’s hard to discount the business as one that could provide consistent shareholder value.
What I’m doing now
Overall, I reckon Vodafone shares are worth considering for my holdings. However, I am concerned about the dividend cut and debt levels. Conversely, growth opportunities excite me.
From an income perspective, I reckon there are better stocks out there for me. So for that reason alone, I’ll keep Vodafone shares on my watch list for now, but may be tempted to revisit my position sooner rather than later.
