LONDON -- Vodafone (LSE: VOD) (NASDAQ: VOD) is a popular stock with income investors, but some shareholders have become concerned at the increasing fragility of its cash flow.

Free cash flow
It's worse than you think. Analysts look at free cash flow -- operating cash flows less capital expenditure -- to assess a company's ability to keep funding its dividend. But the free cash flow figure that Vodafone reports is an idiosyncratic measure including income from associates it doesn't control, mainly U.S. joint-venture Verizon Wireless, but excluding license and spectrum payments it's obliged to make. Reverse those items and the picture looks like this:

Metric

2010/11

2011/12

2012/13

Vodafone's own free cash flow

2.6

3.5

1.1

Income from associates

1.5

4.0

4.8

Dividends paid

4.5

6.6*

4.8

Numbers in billions of pounds. *Excludes 2 billion pound special dividend.

Problem
Newbury, we have a problem. The cash from operations controlled by Vodafone falls woefully short of supporting the dividend. No wonder income investors such as Invesco Perpetual's Neil Woodford have bailed out.

Vodafone's Southern European businesses are suffering from deep recession, while the firm has strategic weaknesses as consumers devour more data and incline toward services that bundle mobile with Internet and TV. Vodafone CEO Vittorio Colao sees a fix in buying European cable operators like Kabel Deutschland and Fastweb, but a bidding war for Kabel could be expensive. It's a shame Vodafone doesn't have a better track record in acquisitions.

Success
One purchase has proved a spectacular success. Verizon Wireless' majority shareholder has reportedly offered $100 billion to buy out Vodafone's 45% interest, and some analysts have put a figure of $130 billion or more on the stake. It's impossible to value Vodafone without taking into account VZW's value, which is in Vodafone's books at just $38 billion.

$100 billion equates to about 130 pence per share. $130 billion would be 170 pence. Estimates of the tax on a sale have varied wildly, but it's fair to assume the company would net something in this range if a deal were struck.

Value
That begs the question, what is Vodafone's value without VZW? Despite a history of big impairment charges, it's reasonable to start with its adjusted EPS. My back-of-an-envelope calculation, assuming a 20% tax rate on dividends Vodafone receives from associates, splits adjusted earnings thus:

Metric

2010/11

2011/12

2012/13

Adjusted EPS

16.7

14.9

15.6

Less: EPS due to associates

7.8

7.8

10.5

Vodafone's own EPS

8.9

7.1

5.1

All figures in pence.

Applying Vodafone's 11.5 projected P/E ratio to earnings of 5.1 pence suggests a value excluding VZW of around 60 pence, or 80 pence if you take the 7 pence three-year average EPS. Adding 130 pence to 170 pence for the VZW stake values Vodafone in the range of 190 pence to 250 pence, compared to its current market price of 185 pence.

Message
A different person on a different day would come up with different figures, but the message is clear: Vodafone may no longer be a reliable income stock, but it could be a value play.

For a safer source of dividend income, I suggest you look at The Motley Fool's choice for this year's top income stock. That's a company yielding well over 5% in a sector that has good visibility of earnings, with a policy of increasing dividends by at least the rate of inflation. You can download the analysis by clicking here -- it's free.

Fool contributor Tony Reading owns shares of Vodafone. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.