The telecoms giant's shares rise after it wins a crucial tax battle in India.
On Friday morning, there was good news for Vodafone (LSE: VOD) shareholders, after the telecoms giant announced a surprise victory in a crucial tax case in India.
Tax relief
The dispute arose as a result of Vodafone's $11 billion (£7 billion) investment in 2007 to secure a controlling stake in Indian rival Hutchison Essar.
The FTSE 100 firm argued that no tax was due on the transaction, because it was made between two non-Indian corporations. The Indian tax authorities argued otherwise, on the basis that the assets of Hutchison Essar (now Vodafone India) were almost entirely based in the sub-continent.
Last November, Vodafone lodged 25 billion rupees (nearly a third of a billion pounds) in cash with the Indian tax office, as a deposit to set against any potential liability. However, following its victory in the Indian Supreme Court, this sum will be returned to Vodafone, together with interest at 4% a year.
Had Vodafone lost this case, its tax liability could have been as high as £1.6 billion, including accrued interest over nearly five years. Although this is a huge figure, it is a mere fraction of the firm's £90 billion market value. Even so, divided among 50 billion Vodafone shares, it could have caused a one-off, pre-tax reduction of around 3.2p to earnings per share.
Vodafone wins again
At Friday's market close, Vodafone shares ended at 177p, up 2.5p in a falling market.
Clearly, Vodafone shareholders should celebrate the latest in a run of successes for the mega-cap mobile company.
Vodafone's win improves India's attractiveness for inward investment from foreign firms, including from Vodafone itself. After China, India is the world's second-largest market for mobile phones, with 600 million mobile subscribers among its population of 1.2 billion. Hence, we can expect Vodafone to scale up its investment and marketing activity in India.
In addition, last July brought more good news for Vodafone's owners, when it announced a maiden dividend of £2.8 billion from its 45% stake in Verizon Wireless, the USA's second-largest wireless carrier. More recently, Vodafone has attracted negative press for an alleged 'sweetheart deal' with HM Revenue & Customs aimed at reducing its UK tax liabilities.
Vodafone's valuation
With more than 360 million customers, Vodafone's brand is one of the world's best known and most valuable. However, you don't need to pay a hefty premium to buy into this British success story.
At present, Vodafone shares trade on a forward price-earnings ratio of 11 and offer a prospective dividend yield of 7.3%, covered 1.2 times (which includes a special dividend payable next month).
For my money, Vodafone's brand and business are both undervalued, making its shares particularly attractive to income-seekers and dividend devotees.
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