Vodafone's £2 Billion Giveaway

Published in Company Comment on 29 July 2011

Next February, the telecoms giant's owners will share a very special dividend!

This morning, Vodafone Group (LSE: VOD) sprang a nice surprise on its shareholders. As I write, its shares are up 5% at 174p, yet still offer great value.

£2.8 billion in

Europe's biggest telecoms operator today revealed that it is set to receive a £2.8 billion dividend from Verizon Wireless.

Vodafone owns 45% of Verizon Wireless, the second-largest wireless carrier in the US. The good news is that the board of Verizon has decided to pay a $10 billion (£6.1 billion) dividend to its shareholders. Thus, Vodafone's share of this bumper payout is $4.5 billion, which is close to £2.8 billion.

£2 billion out

What will Vodafone do with this slug of cash, which is due to arrive on 31 January 2012?

The good news is that Vodafone has decided to return £2 billion of this cash to its owners. This will arrive via a special dividend to be paid to shareholders next February. With around 51 billion shares in issue, Vodafone's owners will bank an extra cash payout of 4p a share. The remaining £0.8 billion will be used to reduce Vodafone's net debt.

Vodafone's CEO, Vittorio Colao, remarked,

"Our long-term partnership in Verizon's strong and successful wireless business has seen the value of our investment increase significantly over recent years. The dividend from Verizon Wireless allows us not only to reward our own shareholders with an immediate and sizeable cash return, but also to continue to reinvest in our business to improve our customers' experience, further strengthen our competitive position and create additional value for shareholders."

Big numbers

Despite being an £89 billion behemoth, Vodafone has been pretty sure-footed of late.

Last month, it collected £7 billion in cash by selling its 44% shareholding in French mobile operator SFR to media conglomerate Vivendi. The board of Vodafone voted to use £4 billion of this windfall to buy back 5% of its shares, in order to boost future earnings per share.

What's more, the announcement from Verizon vindicates Vodafone's decision to play the long game in the US cellphone market. Verizon's $10 billion dividend could be followed by more payouts, thus demonstrating the value of Vodafone's toehold in the US.

Based on forecast earnings per share of 16.8p, Vodafone shares trade on an undemanding price-earnings ratio of 10.4. What's more, with a prospective full-year dividend of 8.9p (excluding the 4p special dividend), they yield 5.1%, covered 1.9 times.

In my view, the UK's most valuable brand (with 360 million customers worldwide) remains undervalued, with its shares especially appealing to income-seeking investors.

More from Cliff D'Arcy:

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Comments

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ralos 29 Jul 2011 , 12:56pm

All good things come to those who wait!

kiffberet 29 Jul 2011 , 1:26pm

One off dividend and the rest to pay down debt!?! That's the most shareholder friendly act I've ever heard of!!

I  VOD.

tophernator 29 Jul 2011 , 1:52pm

I'm curious as to whether exchange rates are a theoretical issue? My previous experience with dividends declared in dollars and cents is that the payment to british shareholders is based on the exchange rate on a particular date.Given that the payment isn't due until 2012; does anyone know precisely when the exchange rate will be applied? With all the crazyness going on in the states right now $10 billion could end up being worth substantially more or less than £6.1 billion.

archibold 29 Jul 2011 , 9:56pm

@tophernator

This is the type of transaction that Fx futures were designed for....although I'm sure for a group like VOD it is a lot more complex than just one transaction, they could choose to book a rate now. Of course through options they could also lock in the option to buy GBP and sell USD at a given date. Though it's likely to depend on USD funding requirements/other flows etc etc. I'd assume they will do something as they have indicated the special div in pence and not cents (like BP for example quotes its dividends when declared).

Luniversal 30 Jul 2011 , 10:58am

Yes, wouldn't it be great if Shell also announced its divis in sterling, like the one it set this week?

But I suppose for a London-listed, UK-incorporated company with a class of equity designed for British investors, forward-buying enough currency to cover the cost of a quarterly distribution is just too expensive-- when instead you can make your owners wait till Aug. 26 to find out how much their dividend is worth.

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