8.6% dividend! Is this FTSE 100 stock too good to be true?

This FTSE 100 The stock certainly seems like something to call home. After all, the dividend yield is more than double the 4.1% of the index paid in 2022.

The company in question is Vodafone (LSE:VOD). Its share price has fallen 33% over the past year, yielding a higher dividend than overhead wires.

Should I open Vodafone shares at this price? Or Mr. Market has punished the telecom giant with good reason?

Lethargic growth forecast

Vodafone of course not high growth prospects. Analysts estimate the company’s revenue will grow at a slow 0.5% per year. This is based on a line drawn through 19 forecast forecasts of Vodafone’s earnings trajectory, compiled by software firm Simply Wall Street.

Worryingly, that leaves Vodafone trailing the UK market, which is forecast to grow revenue by 4.3% annually.

Meanwhile, the European wireless telecommunications sector is expected to grow by 1.7% annually. This means that the percentage of the telecom pie in the hands of Vodafone will decrease in the coming years.

Vodafone’s FY23 Q3 trading update shows a decline in revenue. In Q2, the group’s revenue has increased year on year by 2.5%, in Q3 it fell to 1.8%. Even the 1.8% figure is very generous: it includes a 52.9% increase in income in inflation-stricken Turkey. With the Turkish anomaly excluded, revenue rose just 0.5% in Q3.

The company explained that the poor growth is due in part to the EU Telecommunications Act. From 1 July 2022, regulations coming out of Brussels stop Vodafone from charging travelers in the EU and EEA extra fees for calls, texts and internet use outside their home country. The ‘roam-like-at-home’ scheme will remain in effect until 2032. Vodafone saw Q3 revenue growth in European contracts of 1.1% compared to the previous year partly on the back of this change.

On the bright side, Q3 growth remained respectable in Africa at 3.5%, driven by higher data usage and good demand for financial services.

Hold the line

Of course, if I’m looking for stocks with high dividends, I usually have to follow my expectations for wild growth. Dividend aristocrats, for example, tend to be slow and steady movers.

But I think Vodafone falls short even as an income deposit. The next dividend payment on shares of PT. To take a single data point, in 2012 shareholders earned 18p per share, but by 2022 it had fallen to 8p.

In other words, the increase in dividend yield is only driven by the steady decline in stock prices. This is not a story about rising dividend payouts.

And the dividend could be cut again in the future. The payout ratio is unsustainable at 123%, which means that earnings are not far enough to make payments. At the same time, Vodafone’s debt-to-equity ratio has rocketed from 63.4% to 114% over the past five years.

I would not add Vodafone shares to my portfolio, despite the excellent telecom infrastructure it has in 21 countries. The dividend payout seems unsustainable to me, and the weak growth and growing debt burden set off alarm bells in my head.