I've become increasingly worried about the size of and attitude towards corporate debt over the last couple of years. I think that the recent collapse of Carillion is just the canary in the mine.

BOND PROXIES

With such low yields from bonds and a potential collapse in bond prices should inflation rear its ugly head, many (especially FTSE 100) companies have become increasingly more popular as bond proxies to serve as part of income portfolio's. This has had the effect of increasing PER's and subsequent market caps and stretching their valuation to a point where upside potential is low while risk to the down side is high.

But at what price does the high yield come at? It appears that some companies are being overly generous with their dividends to a point where they are borrowing money to pay them. Like Carillion who paid out £441m in the last 6 years alone, this appears to be misallocation of capital on a grand scale

To give a few examples, and this is by no means extensive research, I have listed 5 companies below. The following figures are taken from Stockopedia stock report and cash flow account.


VODAFONE

Mkt Cap - £60.9bn
Ent Value - £90.3bn
Net Debt - £29.4bn (48% of current Mkt Cap)
NTAV - £20.3bn
Dividend – 5.65%

What makes the Vodafone debt even more surprising is that it sold its Verizon holding in 2014 for $130bn (£84bn at the time). Rather than totally eradicating its debt it paid a very generous £51bn in special dividends.

Average net profit over the last 3 years (post Verizon sale) is -1.47bn euros (yes that's minus), however it has paid out £11.66bn euros over the same period.

Vodafone forecasts for the next two years average at 2.88bn euros/year. So in order to pay back this debt at the current expected net profit it would take 11.7 years to pay the debt back (ignoring interest savings on reduced debt) and this would be at the expense of zero dividends.

Mean while back at Vodafone towers the FD has decided that it is prudent to pay a dividend of 5.65%, completely bonkers. Most of the crown jewels were sold off in 2014 leaving NTAV of £20.3bn, how much of…

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