The London stock market is home to a vast array of dividend stocks. And some of the most popular are found within the FTSE 100. In fact, looking at the UK’s flagship index, Vodafone (LSE:VOD) is currently offering one of the biggest yields at 11%.
Assuming this payout can be sustained, that’s quite a chunky gain for investors to capitalise on. After all, the index’s average return is typically around 8%. In other words, by investing in Vodafone, investors can seemingly unlock market-beating performance overnight. But is this too good to be true?
What’s going on with Vodafone shares?
Over the last five years, the telecommunications giant hasn’t had a great run. While dividends have been held steady, the group’s share price has tumbled by nearly 50%, vastly underperforming its parent index. And even in the last 12 months, the stock hasn’t exactly fared much better, falling 30%.
There are a lot of factors influencing the company’s market capitalisation. However, it seems investors have gotten increasingly concerned about the group’s state of debt, especially given the recent interest rate hikes.
The dwindling state of Vodafone is nothing new. Despite numerous attempts to turn the business around, underlying performance continues to limp on in its core markets like Germany.
In 2024, the newly appointed CEO, Margherita Della Valle, is the next in line to try and right the ship. But unlike several of her predecessors, she seems to be making impactful moves. Her plan revolves around streamlining operations and retargeting focus back to where Vodafone has the most to gain.
This strategy is what led to the disposal of the group’s underperforming Spanish division, with the Italian segment looking like it’s next on the chopping block. Meanwhile, the firm has partnered with Microsoft to expand several of its product lines. That includes its wildly successful M-Pesa payment processing platform in Africa.
Time to buy?
Despite the challenges facing this business, management appears content with maintaining the stock’s current dividend payout. In other words, the yield looks like it’s here to stay, opening the door to a lucrative stream of passive income.
However, the gains generated by this income stream may continue to be offset by a falling valuation. The disposals have helped raise a nice chunky of cash to pay down debt and other liabilities. But it’s worth pointing out there’s over almost €46bn (£39.3bn) of outstanding loans. By comparison, the company’s market capitalisation is currently only worth £19bn.
Leverage continues to be the chief concern surrounding this business. If Della Valle’s strategy’s successful, then a Rolls-Royce-style turnaround could be in store for patient investors. But at this stage, that’s a pretty big ‘if’. Therefore, I’m not currently tempted to add this enterprise to my portfolio. Instead, my focus is on hunting down other dividend stocks with healthier balance sheets.
This post was originally published on Motley Fool
