Vodafone's shares have fallen 10% during the course of 2012 compared with a 6% rise for the Footsie. On the positive side, the company has paid out handsome dividends, including a special dividend, pleasing many investors who hold Vodafone primarily for income.
Vodafone's interim results in November disappointed the market, despite management saying it expects underlying operating profit for the year to March 2013 to be toward the upper end of its previous guidance.
Tougher market conditions in southern Europe and a big writedown of the group's businesses in Spain and Italy were headline-grabbing negatives. However, I think cashflow -- expected to be in the bottom half of previous guidance -- and uncertainty about future dividends weighed more heavily on investors' minds and on the share price in the latter part of 2012. Furthermore, I think these will continue to be key issues in 2013.
Vodafone's three-year commitment to raise its ordinary dividend by at least 7% a year is coming to an end. The ordinary dividend that will be announced with the company's full-year results in May will be the last under the existing commitment, and management has yet to unveil its new policy.
The future of special dividends is also uncertain. The special that Vodafone paid in January this year came out of a 2.8 billion pounds dividend it received from Verizon Wireless, the U.S. mobile giant in which it has a 45% stake.
Verizon Wireless is majority-owned by Verizon Communications (NYSE:VZ), which in the past has effectively starved Vodafone of cash, apparently in the hope of persuading the U.K. group to sell its stake in Wireless.
There was much coyness from the Verizon camp about whether Wireless would pay further dividends, but the company did eventually announce another distribution (worth 2.4 billion pounds to Vodafone). However, Vodafone then took shareholders by surprise by announcing there would be no special dividend for them this time around, but a share buyback program instead.
While Vodafone's policy on its ordinary dividend should be resolved in the first half of the 2013 calendar year, the second half is likely to see a double uncertainty about the possibility of a special dividend: first, a repeat of this year's anxieties about whether Verizon Wireless will even pay a dividend; and, second, if it does, what Vodafone will do with the cash.
Investors expect dividend predictability and reliability from a mature, utility-like company such as Vodafone -- but at the moment they haven't got it. At a recent share price of 161 pence, Vodafone's ordinary dividend may yield 6.3% for the year to March and the 12-month forward price-to-earnings ratio may be a modest 10, but I can't help feeling there needs to be more clarity on future dividend flows for the shares to rerate higher to any significant degree.
Ace City investor Neil Woodford has trounced the market over the past 15 years by focusing on strong, cash-generating companies with sustainable dividends. He holds Vodafone, but has reduced the size of his stake during the course of 2012 -- perhaps because of the issue of dividend visibility.
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