Vodafone PLC: A Financial Analysis of Gearing and Dividend Policies

This report provides a financial analysis of Vodafone PLC, focusing on its gearing and dividend policies. The study examines the company's capital structure, utilizing gearing ratios to assess the proportion of debt and equity. It delves into Vodafone's dividend policy, evaluating payout ratios and their impact on shareholder returns. The analysis incorporates relevant financial theories, including traditional gearing theory, Modigliani and Miller's theories, and the static trade-off theory, to provide a comprehensive understanding of Vodafone's financial strategies. The report highlights fluctuations in profitability and their effect on dividend stability, ultimately recommending improvements in operational activities and dividend policies to enhance shareholder value and financial stability. The analysis is supported by data from annual reports and industry insights, offering practical recommendations for Vodafone PLC's financial management.

Financial
management
1

TABLE OF CONTENTS
Abstract............................................................................................................................................5
Procedures of investigation..............................................................................................................6
Introduction......................................................................................................................................7
Analysis of financial information....................................................................................................7
Gearing policy..............................................................................................................................7
Dividend policy..........................................................................................................................11
Conclusion.....................................................................................................................................14
Recommendations..........................................................................................................................14
References......................................................................................................................................15
2

INDEX OF TABLES
Table 1: Gearing ratios of Vodafone Plc.........................................................................................8
Table 2: Dividend ratios of Vodafone Plc.....................................................................................11
Table 3: Payout ratio of Vodafone Plc...........................................................................................12
3

ILLUSTRATION INDEX
Illustration 1: Debt equity ratio of Vodafone Plc.............................................................................8
Illustration 2: Time interest ratio of Vodafone Plc..........................................................................9
Illustration 3: Traditional gearing theory.......................................................................................10
Illustration 4: Strict trade off theory..............................................................................................11
Illustration 5: Dividend ratios of Vodafone Plc.............................................................................12
Illustration 6: Payout ratio of Vodafone Plc..................................................................................13
4

ABSTRACT
Financial analysis is study based on evaluation of financial facts and figures in order to
make viable decisions for the business. In the present study analysis of gearing and dividend
policy was conducted to provide recommendation to the Vodafone Plc regarding further
improvement. Financial analysis in the study shows that company is not performing effectively
due to high fluctuations in their profits. Management of the organization is required to modify
their dividend policy and operational activities in order to enhance value of business.
5

PROCEDURES OF INVESTIGATION
For the accomplishment of present study information has been obtained from
consultation of documents such as annual reports, industry report and online articles. Information
obtained from these sources is relevant and reliable to satisfy the objective of the study.
6

INTRODUCTION
Financial management is concerned with effective and efficient use of monetary funds in
order to achieve aims and objectives of individual or organization. In commercial entities it is a
specialized function associated with the top management (Needles and et. al. 2012). Present
study is focused on evaluation of dividend and gearing position of Vodafone. It is one of the
largest British multinational telecommunication company. Headquarter of the company is
situated in London. Major operational activities of company comprises of providing
telecommunication and IT services to the corporate clients in more than 61 countries. In this
study analysis of dividend and gearing policies will be done by considering data of past five
years. This analysis will be supported by corporate objectives, practices of industrial sector and
relevant theories.
ANALYSIS OF FINANCIAL INFORMATION
Gearing policy
Various analytical tools and ratios are used to analyse financial strengths and
performance of companies. Gearing analysis is covered in such analysis tools that provide
effective evaluation of capital structure of the company. Gearing can be defined as similar to the
debt equity ratio. This ratio provides comparison of debt financing to the owner's equity or to the
amount of capital. Analysis of this ratio is important because it is mainly focused on concept of
financial leverage instead of computation of exact ratio (Magena and Kinman, 2007). It is vital
concept to be understand for the user because high level of debt can strain financial resources of
the company.
Gearing policy is vital for the stakeholders of the company. It is because, large portion of
capital structure is covered by financial source which is to be paid by fixed interest or dividend
producing debt. In situation of economic downturn, high debt can cause severe issues of the
company because due to reduction of profitability company will face issue in payment of interest
and principal amount (De Franco, 2011). This aspect depicts that, reduced cash flows and profits
of the company may not support high debt burden and associated interest payments.
7

8
2015 2014 2013 2012 2011
0
0.1
0.2
0.3
0.4
0.5
0.6
0.42
0.37
0.56
0.50
0.42
f(x) = 0.01x + 0.41
Debt Equity Ratio
Linear (Debt Equity Ratio)
Illustration 1: Debt equity ratio of Vodafone Plc

By considering gearing ratio of the company it can be noticed that main part of the capital
structure of the company comprises of equity portion. However, company is making increase in
their debt portion but still in comparison to equity this part is not appropriate. This aspect shows
that company has less long term financial obligations. By considering profitability of company,
high fluctuating trend can be noticed (Annual report of Vodafone Plc, 2015). By considering this
fact, company had not made increase in their long term financial obligations. By considering this
aspect it can be said that company has low gearing. It is an optimum gearing policy because it
will provide adjustment in financial cost in situation of low profits or loss. Company is not
earning good profits, due to which they are required to make increase in stability of financial cost
in order to earn profits (Gibson, 2010). With the increase portion of equity, company is required
to make increase in the dividend with the growing sales of business. In case of debt, this cost will
be increased because company will be required to pay higher cost even in situation where they
are not earning sufficient profits.
Traditional theory of gearing
9
2015 2014 2013 2012 2011
-8
-6
-4
-2
0
2
4
6
8
1.12
-7.03
2.81
6.34
0.36
f(x) = 1.19x - 2.84
Time interest ratio
Linear (Time interest ratio)
Illustration 2: Time interest ratio of Vodafone Plc

In accordance with the traditional theory of gearing earnings remain constant in
perpetuity and it is assumed that expectations of investors will not be changed. Taxation is
ignored and risk is considered to be constant and all remaining earnings is paid out in form of
dividend. By considering this assumption following graph is prepared-
In accordance with this theory point x shows optimum portion of debt and equity where
cost of equity is tended to be increased. By considering this theory, gearing policy of the
organization is appropriate as cost of debt and cost of equity is not proportionate. However, this
theory has various loopholes because it does not consider tax shield and other vital aspects.
Modigliani and Miller's 1963 theory with tax
In accordance with this theory, high gearing make increase in possibility of bankruptcy
and consequently there will be increase in WACC as share price of the business will be reduced.
In addition to this, several restrictions are imposed by debt holders such as level of dividends,
level of additional debt that can be raised and on disposition of assets (Gearing theories, 2015).
By considering this theory, gearing policy of the company is appropriate because there is low
percentage of debt in comparison to equity.
Static trade-off theory
Modigliani and Miller theory is revised by Static trade-off theory. In accordance with this
approach both excessive and lower debt ratio is not optimal. It is because, debt finance has its
10
Illustration 3: Traditional gearing theory
(Source: Gearing theories, 2015)

own pros and cons. However, marginal value of benefit of debt finance is still higher in
comparison to cost of debt finance.
This theory suggests that company should maintain this structure in order to make
increase in overall valuation of business.
Dividend policy
Dividend policy can be defined as set of guidelines used by a company to make decision
regarding payment of their earnings to the shareholders. It is concerned with the financial
policies of business.
11
Illustration 4: Strict trade off theory
(Source:Gearing theories, 2015)

12
2015 2014 2013 2012 2011
0
5
10
15
20
25
2.16
22.21
0.16
2.5 2.77
1.07 1.93 1.79 2.38 1.63
f(x) = -1.85x + 11.51
Earnings per share growth -
Adjusted
Linear (Earnings per share
growth - Adjusted)
Dividend
Linear (Dividend)
Illustration 5: Dividend ratios of Vodafone Plc

By considering dividend policy of the Vodafone Plc, it can be noticed that due to high
fluctuations in profitability company is not able to provide stabilized return to their shareholders
With the fluctuating profit, company is also making adjustment in their payout ratio. Due to this
aspect, risk for the shareholders has been increased.
According to the dividend irrelevance theory given by Modigliani and Miller, there is no
impact of dividend policy on the capital structure and stock price of the company. However,
interest of stakeholders is affected by return regardless of stock dividend. By considering
perspective of investors it can be noticed that they will prefer to make investment in a company
with higher dividend instead of lower dividend. Further, in situation of lower dividend they can
sell the stock of the company for the replication of cash flow. By considering this approach it
can be said that company is not having optimum policy of dividend because it has high ups and
downs (Annual report of Vodafone Plc, 2015).
In accordance with the Bird-in-the-Hand Theory, total return of the investors is
equivalent to the sum of dividend yield and capital gains of the company. This aspect shows that
if company is making increase in their payout ratio then equity shareholders of the organization
13
2015 2014 2013 2012 2011
0
50
100
150
200
250
300
350
400
450
381.1
24.6
64.8 58.9
f(x) = -60.42x + 313.61
Payout ratio
Linear (Payout ratio)
Illustration 6: Payout ratio of Vodafone Plc

will be concerned that capital gains will be dissipate. This aspect shows that company should
optimize their payout ratio for the reinvestment of retained earnings in business.
Further, tax preference theory states that tax are vital aspect for the investors. This fact
has been stated because of difference in tax rate of capital and revenue benefits of the
shareholders (Corporate Finance - Dividend Theories, 2015). This aspect shows that investors
prefers capital gain in comparison to revenue benefit. This policy also provide recommendations
to make change in dividend policy regarding pay out ratio of the company.
CONCLUSION
In accordance with the present study conclusion can be drawn that Vodafone Plc had
optimum gearing policy but poor dividend policy. Company is not able to stabilized returns and
consequently dividend policy of the organization is affected by it. In addition to this, they are
having fluctuating pay out ratio by which shareholders of the company has opportunity to realize
profits in both capital and revenue manner. However, gearing policy of the company is
appropriate because proportion of debt and equity is optimum. Company should also provide
attempt to make stability in their return in order to make reduction in the risk of shareholders.
RECOMMENDATIONS
By considering the present study, Vodafone Plc is recommended to make change in their
dividend policy in order to earn high profitability. For this aspect, they are recommended to
make improvement in their operational activities. With this approach, they will able to attain
better efficiency and productivity in order to achieve their aims and objectives in an effective
manner. In addition to this, there will also be increase in value of business due to significant
increase in operational efficiency of business. Further, change is required to be made in the pay
out percentage of the business by considering viewpoint of shareholders regarding tax planning.
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REFLECTIVE
Financial management is the foremost aspect for any corporation because it helps
management to allocate financial resources and accordingly give upward direction to business.
Above mentioned topics and anlysis part prove to be effective or fruitful for me in content of my
own development in specific field. This is because it has become source of learning and provided
knowledge regarding the financial aspect. The above mentioned two aspect such as gearing
policy and dividend policy enhances my learning towards the financial management. It provided
me immense learning in the same filed by which I can easily analyze the performance of
corporation on the basis of these specified perspective. Here, I calculated ratio of corporation
which assists me to assess the debt equity ratio and accordingly analyze the performance
company for future time span. This proves to be effective for me in case I start my own business.
This is because I came to know that there must be balance in the equity and debt otherwise
corporation face issue in managing consistent flow of production. After analyzing the
performance on the basis of debt equity, I also came to know that management must put effort to
access costly sources of finance. Instead debt financing must be avoid in order to enhance the
profitability and determine long run growth of business. However, I got knowledge that how
economic downturn affect the situation of company if it access to debt finance. Owing to this,
my knowledge is enhanced in the same field that economic downturn could affect liquidity of
corporation very badly.
Furthermore, several traditional and modern theories are applied in the study. This
explanation of theories made me understand that use of tradition theories are no more in use.
The reason behind the same is that traditional theory assume that expectations of investor will
not be changes also risk and taxation are ignored. This proves to be unrealistic and in turn
investor face issues in calculating their earning. Apart from this, by using static trade off theory I
came to know that it is not feasible for organization to keep excess or extreme low debt ratio. In
this regard organization need to keep balance in the capital structure so as to enhance the
valuation of corporation in the marketplace. Here, theory brought into my notice that with the
help of cheaper debt finance value of firm will be increased and thus it will be able to create
competitive edge.
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I explained dividend policy in the report which assisted me to calculate earning per share.
Also, I calculated the payout ratio which leads to assess the financial structure of corporation.
Thus, I got guideline to manage my own business and accordingly prepare my capital structure.
In addition to this, Modigliani and Miller I found that no any impact is seen on the capital
structure due to change in dividend policy. At the same time I found that investor like to invest
only in those project which generate high rate of return. Furthermore, I came to know that it is
very important for management of organization to control their payout ratio and invest the
retained profit in profitable business project. This in turn enhance overall rate of return and give
upward direction to business.
Apart from this, application of several theories make it possible for me to understand the
need of modern theories and concept of the same to meet the expectations of stakeholders as well
as well being of corporation. Thus, I came to know that it is very important shed light on cost,
need of stakeholders and other related factors while preparing the financial structure.
Thus, after competing the study, my analyzing skills has been developed. Also, it helped
to speed up my thinking power in field of financial management of corporation. This played vital
role in sharpening my skills related to communication as well as time management. This is
because during completion of the report I managed less time optimally. This aspect proves to be
effective for my career so that I can easily complete the task allotted to me in short time span. On
the other hand, communication skills are developed because after calculating several ratio I also
provided recommendation to the corporation. During that process I used several techniques term
in order provide valid justification which serves as learning for me.
16

REFERENCES
Books and journals
De Franco, G. (2011). The benefits of financial statement comparability. Journal of Accounting
Research, 49(4), pp. 895-931.
Gibson, C. (2010). Financial reporting and analysis: Using financial accounting information.
Cengage Learning.
Magena, M. and Kinman, R. (2007). Investment analysts’ perception of disclosure in UK interim
financial reports. Journal of Applied Accounting Research, 8(3), pp.146 – 185
Needles, B., and et. al. (2012). Principles of accounting. Cengage Learning
Online
Annual report of Vodafone Plc. (2015). [Online] Available through:
<http://www.vodafone.com/content/annualreport/annual_report14/downloads/
full_annual_report_2014.pdf>. [Accessed on 13h November 2015].
Corporate Finance - Dividend Theories. (2015). [Online] Available through:
<http://www.investopedia.com/exam-guide/cfa-level-1/corporate-finance/dividend-
theories.asp>. [Accessed on 5th November 2015].
Gearing theories. (2015). [Online] Available through: <https://www.crcpress.com/Theory-of-
Gearing-Kinematics-Geometry-and-Synthesis/Radzevich/9781466514485>. [Accessed
on 5th November 2015].
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APPENDIX
Table 1: Gearing ratios of Vodafone Plc
Ratios 2015 2014 2013 2012 2011
Gearing ratios
Debt Equity Ratio 0.41 0.37 0.55 0.5 0.42
Time interest ratio 1.12 -7.02 2.81 6.33 0.36
Table 2: Dividend ratios of Vodafone Plc
Ratios 2015 2014 2013 2012 2011
Dividend ratio
Earnings per share growth - Adjusted 2.16 22.21 0.16 2.5 2.77
Dividend 1.07 1.93 1.79 2.38 1.63
Table 3: Payout ratio of Vodafone Plc
Ratios 2015 2014 2013 2012 2011
Payout ratio 381.1 24.6 - 64.8 58.9
Table 4: Gearing ratios of Vodafone Plc
Ratios Formula 2015 2014 2013 2012 2011
Gearing ratios
Debt equity ratio
Debt 27531 25999 39997 38616 36590
Equity 66145 70802 71447 76935 87555
Debt Equity Ratio Debt/ Equity 0.41 0.37 0.55 0.5 0.42
Time interest ratio
Earning before interest
and taxes 1967 -3913 4728 11187 537
Interest payable 1764 557 1684 1765 1496
Time interest ratio
Earnings before interest
and taxes / Interest
payable
1.12 -7.02 2.81 6.33 0.36
18