An investment in Vodafone is currently very much a binary bet between whether you believe that they are going to have to cut the dividend or not. Guy Peddy of Macquarie Securities, forecasts that Vodafone (LON:VOD) will cut the dividend to €0.08 (or ¢8) and the share price will fall 19% to 125p. At this level Vodafone (LON:VOD) would still be yielding an attractive 5.65%. However, the concern over the maintenance of its dividend has driven the share price down to 149p where it is yielding an extraordinary 8.9%.

I’ve had a look at the cash flow figures and whilst there isn’t much headroom currently there isn’t anything that would cause sufficient stress to force managements’ hand. Nick Read as the new CEO (1 Oct 2018) has already taken the opportunity to change the dividend policy from ‘progressive dividend growth’ to maintain at the current level. But with the need to finance the takeover of Liberty Global’s continental Europe cable businesses (€18.4bn) he had the perfect opportunity and justification to make a cut. Now that this is the decision he’s made, I doubt very much that he will want to reverse it.

Vodafone’s current cost efficiency programme is starting to generate significant savings, as a result of their £19bn infrastructure investment (Project Spring). This is targeted at saving €1.2bn in annual operating costs (including a €400m reduction in the current year) and there is another €0.5bn annual operating cost synergy benefits from integrating the Liberty Global businesses. So, there is a trajectory that puts Vodafone in a very comfortable cash flow position without needing to cut the dividend.

Once Mr Market sees that the dividend isn’t under pressure that 8.9% yield will be difficult to resist. This will undoubtedly cause a re-rating in the shares – the question then is by how much? Well let’s say it equilibrates at the same level as BT that is currently yielding a very attractive 6.26%. That would see Vodafone recovering to c.212p – a gain of 42% for anyone buying now plus the opportunity to lock-in an 8.9% yield on the purchase price. Incidentally, working off Macquarie’s projected yield would suggest the share price rising to 235p (up 57%).

So looking at this binary bet, I estimate a…

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