Few large companies are as hard to fathom the future of as at the moment as Vodafone Group (LSE: VOD) (NASDAQ: VOD.US). With a market cap of £110 billion, you might expect it to be like a super tanker that’s unperturbed from one year to the next, but thanks to its decision to sell its stake in Verizon Wireless, Vodafone’s course in 2014 might look more akin to a jet-ski pulling donuts in choppy waters.
Of course, only a massive deal could make a difference with a mega-company like Vodafone – and they don’t come much bigger than the $130 billion one agreed in September to sell out of Verizon Wireless to erstwhile US partner Verizon Communications.
The disposal will shower cash and other assets onto Vodafone and its shareholders – but both will face big decisions in 2014 as they consider how to best deploy their windfall.
Make your mind up time
It’s worth mentioning that there’s a chance the current proposals won’t actually go ahead, although it’s vanishingly unlikely they’ll be significantly altered at this stage.
The terms of the deal and return of value to shareholders are to be agreed at a Shareholder general meeting to be held on 28 January. In the past few days Vodafone’s vast army of shareholders have been mailed a circular including voting forms to enable them to have their say on how they want their company to return the 112p they will receive in shares and cash.
Because Vodafone is being paid for Verizon Wireless in both cash and other assets – primarily a big chunk of Verizon shares – there are non-trivial decisions for ordinary shareholders to make.
It’s fair to say that some Vodafone shareholders will be scratching their heads. If that’s you, then the most important thing to consider is whether you want to fill in the “dealing form”, which means your allocation of Verizon shares will be sold for free and you’ll receive only cash. This is likely to be the cheapest and lowest hassle way to convert the shares into ready money, but do more research to ensure you understand the tax implications and other consequences. Vodafone itself has posted a handy guide.
The more things change, the more they stay the same
Once it has returned much of the deal’s proceeds to shareholders, Vodafone’s share price will fall – just as any company’s price usually does when it goes ex-dividend.
With 112p being doled out we can expect the share price would fall dramatically, which is doubtless why the company has decided to consolidate the shares at the end of February to maintain broad comparability of the share price before and after the return of value.
Given the share price is currently trading at around 224p – roughly twice the 112p being returned to shareholders – then I think it’s a reasonable guess the company will consolidate the shares on a two-for-one basis. This would mean you’ll have half as many shares after consolidation, but they’ll be priced at twice the level they would have otherwise been.
Remember such a move doesn’t actually create or destroy value – it’s simply to maintain the perception of an orderly movement in the share price.
Indeed, the 112p Vodafone stands to distribute is already “in” the price today. Its shares will only become more or less valuable from here based on news about operating results and any changing perceptions about the future of Vodafone’s earnings.
What about the dividend?
And that’s the £79 billion question – which is roughly the amount the company has sold its stake in Vodafone Wireless for. The US division has been a great investment for the company, and provided a lot of latent growth potential. What will it do without it?
Well, firstly I think it’s worth remembering that Verizon Wireless only resumed paying dividends to Vodafone in 2011, after hording its cash since 2005. Vodafone is a share bought for income, but that income was not helped for most of the decade by Verizon Wireless.
So it will be after the sale is done and dusted. Vodafone is expected to earn just over £5 billion a year, which is enough to twice cover a looked-for £2.6 billion in dividend payments. On a (pre-consolidation) per share basis, analysts in aggregate expect a little over 11p in dividends in the next financial year, or a 5% dividend yield.
Some are more pessimistic, pointing out that Vodafone’s operations are now concentrated in slower growing European territories. Remember though that it will have £27.6 billion leftover from the Verizon deal, of which £20 billion or so is yet to be earmarked. The company has some breathing room, in other words. As 2014 progresses, we should get a better feel for the Vodafone of the future. And there’s always a chance of a bid for the slimmed-down company, perhaps from another US giant, AT&T.
