Now that Vodafone (LSE: VOD) (NASDAQ: VOD.US) shareholders have voted to approve the £50bn windfall from the sale of its American subsidiary Verizon Wireless, investors are in line for the largest single return in corporate history. Around 70% of the proceeds from the sale will go to investors, while the other 30% is earmarked to transform Vodafone’s balance sheet.
The scale of the outlay won’t mean Vodafone will struggle to pay its dividend in years to come, either, due to strong cash generation from its other operations. Free cash flow last year was £5.6 billion whereas the dividend bill was £4.7bn. While the FTSE 100 averages a dividend yield of around 3.5%, Vodafone has a prospective dividend yield of roughly 5% — impressive, even among the blue-chip companies.
Does this represent the future for Vodafone? After seeing its share price rise to a 12 year high of 238p, will it now become a steady, reliable income stock; the corporate equivalent of a well-worn, but cosy jumper?
Beating the competition
One thing Vodafone can’t afford to do is get comfortable. Vodafone’s margins are being hit by rising competition and regulation. Now, with its newfound spending power, it has some ammunition to fight back with.
Late last year chief executive, Vittorio Colao, launched Project Spring. The plan will raise capital expenditure by £6bn over three years to improve network quality for customers in Europe and throughout emerging markets such as India and South Africa. There is a growth in data consumption from smartphone users, which means network quality is of utmost importance to win new customers, as well as keep existing ones.
With the added bulk from Project Spring Vodafone is aiming to outmuscle its European competitors. The increase in pressure should be felt worse by Telefonica in Spain, Germany and the UK and Telecom Italia in Italy. Both groups have high levels of debt and lack the provisions to compete on the 4G front. Vodafone aims to expand its 4G (ultra fast mobile internet) coverage to 90% of the population throughout its main markets by 2017, including Britain, Germany, Italy, Spain and the Netherlands.
The complete package
After AT&T announced it has no intention of making an offer to buy Vodafone, shares slumped by more than 6%. Following the Verizon payout Vodafone shares are expected to fall by roughly the value of the windfall, meaning shareholders won’t be much richer than at present. Price is key here, and Vodafone could end up pretty cheap before it makes further inlays into Europe, just as the major economies appear to be rebounding. The scope for a return to growth is there, then, coupled with a high dividend yield to boot.
