Vodafone Turns Top Dividend Payer

British mobile phone giant Vodafone Group Plc ( VOD - Analyst Report ) rewarded its shareholders with the largest ever dividend amid the ongoing weakness and uncertainties in Europe. The company has also become the top dividend payer in the FTSE 100.

Vodafone has been distributing exceptional dividends to its shareholders. In February, the company paid a special and interim dividend of £0.0705 per share, including the £0.04 per share dividend of Verizon Wireless, its joint venture with Verizon Communications Inc. ( VZ - Analyst Report ) .

In addition, Vodafone is expected to pay a final dividend of £0.0647 per share on August 1, to shareholders of record as of June 8. This dividend represents a 7.0% increment year over year, marking the company’s target of minimum 7% dividend growth per annum by March 2013.

Cumulatively, total dividend per share in fiscal 2012 increased more than 50% compared with last year despite the loss of dividends from China Mobile Limited ( CHL - Snapshot Report ) and SFR. Vodafone continues to expect total dividend per share to be at least £0.1018 for fiscal 2013.

As part of the strategy to exit minority holdings,Vodafone realized about £15 billion from the sale of stakes in China Mobile, Softbank Corporation, SFR and Polkomtel over the last two years. The company decided to return part of the proceeds (£6.8 billion) to shareholders in the form of share buybacks. The company expects its share buyback plan to be completed in the near term.

Over the last four years, the company returned almost £26 billion to shareholders, which represents 30% of the market capitalization at the end of fiscal 2012.

The divestiture of minority holdings has also strengthened the company’s balance sheet position. Vodafone’s net debt reduced to £24.42 billion at the end of fiscal 2012 from £29.86 billion last year. The company generated free cash flow of £6.1 billion, down 13.4% year over year but within the guidance range of £6.0–£6.5 billion.

Free cash flow is expected to remain stable in the range of £5.3 billion to £5.3 billion for fiscal 2013, excluding any dividend received from Verizon Wireless.

We are currently maintaining our long-term Neutral recommendation on Vodafone. For the short term (1–3 months), the stock retains a Zacks #3 (Hold) Rank.