What To Do With Your Vodafone Group plc Shares

How much of Vodafone Group plc’s (LON:VOD) share price is bid speculation?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Vodafone

Shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US) are trading around their highest in over a decade. They are buoyed by the impending sale of Vodafone’s share of VZW, which is now nearly certain to happen, and rumours of a bid for the rump of Vodafone from AT&T, which is speculative.

How much of the current share price is due to bid speculation? It’s important to know, as the speculative froth would be blown away if the prospects of a bid evaporated.

Valuation

It’s difficult to put a valuation on Vodafone when it’s in the midst of major transactions that will fundamentally change its nature. Here’s one way of looking at it.

The prospective payout to shareholders on completion of the VZW sale accounts for around 112p of the share price. What is the rump of Vodafone worth?

Vodafone’s shares were trading range of 160p to 190p before the VZW transaction was announced.  At that time the company forecast that adjusted operating profit would be £12.0bn – £12.8bn in 2014. After the sale of VZW, that forecast is reduced to £5bn.  If the market values rump-Vodafone on the same basis as before, the value would be similarly pro-rated. That makes rump-Vodafone worth 64p to 77p.

There seems little reason why the shares should be more highly rated than before. Vodafone’s yield will still be around the 5% mark. True, the forecast free cash flow hasn’t been reduced as much as operating profit: £7bn down to £5bn. That, and a stronger balance sheet from the £13bn debt reduction, makes the dividend safer. But on the other side of the coin, the new strategy is untested and there had for a long time been an implicit value attributed to a potential sale of VZW.

Speculation

Adding the rump valuation and the 112p makes a valuation range of 176p to 189p. That leaves 37p to 50p of the current share price arguably explained by anticipation of an AT&T bid. That’s not unreasonable: various brokers such as Citibank and Bernstein are talking of valuations around the 280p mark if AT&T makes a move. On this analysis, Vodafone is worth 280p if AT&T bids and 176p to 189p if it doesn’t.

AT&T has certainly been looking but there are plenty of hurdles, including alternative acquisition candidates and a relatively unfavourable regulatory environment in Europe.

So investors may want to hedge their bets. I followed the directors’ lead and took some profits at around 216p, but I’m holding on to the rest to see what happens for now. AT&T probably won’t show its hand until after VZW transaction completes.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Tony has shares in Vodafone but no other companies mentioned in this article. The Motley Fool has recommended shares in Vodafone.

 

More on Investing Articles

Investing Articles

3 shares I’d buy for passive income if I was retiring early

Roland Head profiles three FTSE 350 dividend shares he’d like to buy for their passive income to support an early…

Read more »

Investing Articles

Here’s how many Aviva shares I’d need for £1,000 a year in passive income

Our writer has been buying shares of this FTSE 100 insurer, but how many would he need to aim for…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

1 incredible growth stock I can’t find on the FTSE 100

The FTSE 100 offers us a lot of interesting investment opportunities, but there's not much in the way of traditional…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BT share price in the next 3 years

With the BT share price down so low, the dividend looks very nice indeed. The company's debt is off-putting, though.…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

28% revenue growth per year and down over 20% in price! Should I invest in this niche FTSE 250 company?

Oliver says this FTSE 250 company has done an excellent job bringing auctioning into the modern world. Will he invest…

Read more »

Investing Articles

After gaining over 200% in 12 months, what’s next for Nvidia stock?

Oliver thinks Nvidia stock could be as enduring an investment as Amazon. Even given the valuation risks, he says he…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

With a 6.7% yield, I consider Verizon exceptional for passive income

Oliver Rodzianko says Verizon offers one of the best passive income opportunities on the market. He just needs to remember…

Read more »