Income funds with large holdings in Vodafone will take a hit on their expected payouts and should be avoided, a FundExpert investigation has found.
After Vodafone shareholders reaped the rewards of a special dividend it received from its 45 per cent holding in the American company Verizon Wireless in 2011, they expected the same this November.
But disappointingly, the company has decided to use most of its £2.4bn share in Verizon Wireless to buy back shares instead. Vodafone also admitted its half-year results had been "slightly below" expectations, with profits rising by a modest 2 per cent.
With more than a third of UK equity income funds (35 per cent) already cutting their payouts in 2011, the news is far from encouraging for funds with large exposure to Vodafone, who are expected to have to reduce payouts even further.
FundExpert recommends investors be wary of funds with significant weighting in Vodafone, particularly those which have a poor track record at growing their payouts. Instead, focus on funds with a good track record of payout growth, such as JOHCM UK Equity Income (4.60 per cent yield, ISIN: GB00B03KR831) and Schroder Income (3.80 per cent yield, ISIN: GB0007648909 ), which has increased its payout by 106 per cent since 2000.
Last month Leigh Harrison, manager of Threadneedle's Alpha Income Fund told the Investors Chronicle he refuses to invest in Vodafone because it does not provide good value for money.
But earlier this month The Share Centre encouraged income investors to increase their exposure to Vodafone, including it in a list of its top recommended income producing companies in the FTSE 100, along with Royal Dutch Shell, HSBC, GlaxoSmithKline and United Utilities.
And last week it moved Vodafone to a "share pick". Sheridan Admans, investment research analyst at The Share Centre said:
"Vodafone outperformed the UK telecom sector by roughly 25 per cent in the first half of the year as investors seek income in this low interest rate environment. The company is now considered to have defensive qualities and the forecast dividend yield for 2013 is over 6 per cent.
"Although demand for mobile data continued to grow it was at a much slower pace, providing little support for offsetting declines in voice and messaging services. Cash flow generation was also disappointing with Vodafone now expecting it to come in at the lower end of its guidance. With this in mind it is a struggle to see any short to medium term catalyst to drive that share price significantly higher and this is the reason for our change in recommendation."
UK income equity funds with the highest exposure to Vodafone
| Fund | Holding Vodafone (%) | Fund size (m) | Current yield (%) |
| F&C Stewardship Income | 6.63 | 274.54 | 4.3 |
| Premier Monthly Income | 6.61 | 148.6 | 5.57 |
| Premier Income | 6.44 | 321.8 | 4.66 |
| Halifax UK Equity Income | 6.2 | 1,877.98 | 4.1 |
| Scottish Widows HIFML UK Equity Income | 6.1 | 2,888.98 | 4.2 |
Source: FundExpert.co.uk
