Vodafone Collects £7bn In Cash

I've got 11% of my portfolio in vodafone, so a special dividend would have been my preferred choice as well.

The price of 160p looks pretty good, but is this the price vodafone are actually going to pay in the buy back? Will they buy all in one go or spread it over a period of time?

Chief executives have various targets to meet before their full bonus salary is paid. Bonuses usually includes a clause on earnings per share progress, but not as much focus on dividends per share, special dividends or creation of "B" shares.
It therefore seems highly likely that VOD would use the proceeds to boost EPS with a share buyback, to ensure that the executives meet EPS targets.
As I mentioned on the VOD buyback topic this morning: VOD's shares look like good value and I am comfortable with an ongoing buyback unless/until the share price exceeds 200p.

The buyback should to three things, in proportion to the size of the buyback;

Underpin or increase the share price.
Increase earnings per share.
Increase dividends per share.

A £7bn buyback would remove 8.5% of VOD's shares from circulation.

Just a simple question

Why not have two EPS figures? One of them adjusted to strip out effects of buy backs, with this figure being used to calculate directors bonuses of course!

I keep banging on to companies that they need to include share buybacks as part of their investment appraisal process - if it meets their internal hurdle rate for rates of IRR return it is fine - if not don't. Most don't answer my letters - oh well.

Netherwood,

I am not sure about £1bn, and it doesn't happen until next month, but Wood Group is returning £1.40 per share (either as income or return of capital).

They could spend the money buyubg CW Worldwide... (I hold both!)

Share buy backs can be just as bad for investors as any of the other options listed, but then I suppose it depends on the company and the quality of the management to deliver in future. HBOS bought back shares for years to add "shareholder value", then when the game was up for them later they had a couple of rights issues (later as part of Lloyds) screwing more money out of shareholders. I think Vodafone is a much better bet, provided they stay out of banking.

King of the buybacks? Next - over 55% of it shares bought back and still they continue to buy them in. Now that's a text book example of how to add value.

VOD should be commended for the transparency of its buyback programmes. On their company website they produce the detail of their buyback programmes, showing shares purchased and the cost by year. Their regular RNS announcements are also more detailed than all of the other companies I have researched. They detail the cost of the purchase, the number of shares being purchased along with the highest & lowest amount paid and the cumulative number and cost paid to date on that programme.

This transparency makes it easier for an investor in VOD to determine whether the use of funds for buybacks was a good allocation of capital.

During the period 1 April 2003 to 31 March 2011 the company purchased 10.6bn shares at a cost of £14.7bn that's an average cost per share of 139p.

If those shares purchased were held as an investment on the balance sheet, as some people propose, what sort of return would have been achieved?

Taking the timing of cash payments used for the buybacks and the dividend payments saved over those 8 years, I have calculated the Internal Rate of Return (IRR) as 7.6%, based on Friday’s closing price of 160p. This compares with the return VOD makes on its enterprise value of 7.2% (9.8% excluding impairment and sale of interest) and its average ROCE of 7.6% (10.4% excluding impairment and sale of interest) for 2011.

This comparison is only relevant if there were alternative uses for the cash within the business, but does highlight whether the use of the cash would have diluted the returns for the business, if it were accounted for in this way and the asset value was marked to market.

Another way of looking at VOD’s buyback performance, is on an alternative use basis.

If an investor purchased shares at the average buyback price during the financial year 2004 of 136p, what return has he made compared to the return he would have made if those buybacks had been used as increased dividends?

Making the assumption that the shares were purchased in September 2003 and dividends were paid in Feb & Aug each year, the return under the status quo is 6.1% pa, whereas the return utilising the buybacks as enhanced dividends is 5.6% pa.

The enhanced dividend calculation uses an inferred SP from the diluted EPS (from an increased number of shares in issue) and a constant P/E ratio.

This leaves me with the feeling that buybacks were probably the better course of action for VOD over the past 8 years.

Share buy-backs often seem a bit of a lazy option - I would rather seem them investing in their business / products - probably better in the long term.