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Is Vodafone’s 6% dividend yield a no-brainer buy?

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The Vodafone (LSE: VOD) share price has been left behind by the FTSE 100‘s recent bounce.

The telecoms giant has dropped more than 10% over the last six months, leaving this popular dividend stock with a tempting 6.2% dividend yield.

As an income investor, should I be buying Vodafone for my portfolio? I’ve been taking a look at the latest numbers from this £34bn business.

3 things I like about VOD

I’ve followed Vodafone’s progress for many years. Here are the three things I like the most about this business.

Africa: Mobile phones provide many Africans with their only connection to internet and banking services.

Vodafone is the biggest player on the continent, with 185.7m mobile customers and 88m data users. The company’s M-Pesa mobile money service has almost 50m users and handled nearly 6bn transactions during the most recent quarter.

Its African services are growing faster than its European operations, and I expect this to continue.

6% dividend yield: When chief executive Nick Read took charge in 2018, he needed to cut the dividend. However, the reduced payout looks much safer and I think another cut is very unlikely. Given this, the 6% yield is quite tempting to me.

Strong cash generation: Vodafone’s accounting can be quite complicated. But one thing the company always makes clear is how much cash it should generate. So-called free cash flow is expected to be over €5bn this year, providing solid support for the dividend.

Here’s what I don’t like

The company isn’t perfect. It has some persistent weaknesses that help to explain its poor share price performance.

Growth: Vodafone’s UK and European networks operate in mature and competitive markets. This has made it hard for the group to deliver much growth in recent years.

This lack of growth means that while the dividend looks safe to me, I don’t expect it to increase anytime soon. Broker forecasts reflect this — the payout is expected to stay flat for at least another year.

Not very profitable: the biggest problem with Vodafone, in my view, is that it’s not very profitable. The group’s return on capital employed, a measure of profitability, has averaged just 3% since 2017.

This means that the company’s operations aren’t generating enough profit to cover its cost of funding, which is greater than 3%. In stock market jargon, Vodafone has been destroying shareholder value.

CEO Nick Read has recognised this problem and says that improving profitability is one of his top priorities. The company’s recent results show some progress, but can he go far enough?

Vodafone share price: what I’d do

Mr Read has slimmed down Vodafone since taking charge. I think the current business is more attractive than it was five years ago. Profitability is also improving, but slowly.

If the current trends continue and Vodafone’s profits continue to improve, I think Vodafone shares could be worth more in five years. I’d consider this stock as a dividend investment today.

The post Is Vodafone’s 6% dividend yield a no-brainer buy? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. 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.