What will the telecoms giant do with its huge cash pile? Buy shares, of course!
Yesterday, Vodafone (LSE: VOD) announced that it had completed the sale of its minority shareholding in SFR.
Banking £7 billion
On 4 April, the telecoms giant announced that, subject to approval from the relevant competition and regulatory authorities, Vodafone would sell its entire 44% shareholding in French mobile operator SFR to Vivendi, the media conglomerate.
Following the sale, Vodafone has now banked €7.75 billion (£6.8 billion) in cash, plus a final dividend from SFR of €200 million (£176 million). In other words, the group now finds itself with an extra £7 billion burning a hole in its pocket.
However, Vodafone and SFR have signed a 'Partner Market agreement which will maintain their commercial co-operation'. In other words, Vodafone will still have some involvement in the French mobile market, albeit at arm's length.
Splashing the cash
When CEOs of listed companies collect a cash windfall, they tend to get pound signs in their eyes thinking about what to do with all this lovely loot.
Generally, company boards tend to splash this cash on:
1. Ill-thought out M&A (mergers and acquisitions) activity, often overpaying for rival businesses;
2. Share buybacks (thus boosting earnings per share by reducing their share bases);
3. Returning capital to shareholders (often though the issue of 'B' shares or loan notes); or
4. Boosting dividends or paying a special dividend.
For me, these options are ranked in order of attractiveness, with 1) being the least attractive option and 4) the most attractive. Here's why:
Show me the money!
First, I'm wary of CEOs spending shareholders' precious cash on ego-boosting M&A activity. All too often, this destroys shareholder value, as I warned in The Worst Takeovers Of All Time.
Second, there is little evidence that share buybacks make company owners richer, but they certainly benefit directors with fistfuls of share options. City grandee Terry Smith is a fierce critic of share buybacks, as I recently made clear in When Share Buybacks Go Bad.
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Third, I've no real objections to directors returning capital to shareholders, such as the more than £1 billion recently returned to investors in oil and gas engineer Wood Group (John) (LSE: WG) after the sale of its well-support division to US behemoth GE.
Nevertheless, for me, there's nothing better than cash in hand, which is why I prefer higher dividends or a one-off special dividend every time. This leaves me free to decide what to do with my cash, rather than rely on directors to spend it wisely for me!
Vodafone splurges £4 billion on shares
Vodafone -- the UK's third-largest company with a market value exceeding £82 billion -- has decided to go for option two, through a £4 billion programme of share buybacks. Buying back 5% of its own shares isn't the best thing Vodafone's board could do with this new-found cash, but it's not the worst, either.
With Vodafone shares trading on a historic price-earnings ratio of 9.6 and paying a dividend yield of 5.6% (covered 1.9 times), Vodafone has a strong case for buying back these 'value shares'.
Indeed, I'd be happy to join Vodafone's board by buying its shares at their current level of 160p.
More from Cliff D'Arcy:
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