Investors rarely react positively to news of a sharp dividend reduction. But Vodafone Group (LSE:VOD) shares have received a big bump after the firm announced a halving in the shareholder payout from next year.
At 70.3p per share, Vodafone’s share price was last trading 6.4% on Friday (15 March).
To be fair, the market was also impressed by news of a €4bn share buyback programme following another major asset sale. But the dividend cut confirms what many traders and commentators have long predicted.
The question I’m asking here is: are Vodafone shares a brilliant buy following this latest news?
Big sales
Today the FTSE 100 firm confirmed it had agreed to sell its Italian operations to Swisscom for €8bn. This follows the $5bn agreed sale — which comprised €4.1bn in upfront cash and €900m in preference shares — of its Spanish division late last year.
Vodafone said it plans to return €4bn of this cash to shareholders in two separate and equal transactions when these sales are completed.
The firm noted that it “will now focus its operations in Europe on growing markets, where we hold strong positions with good local scale“. It said that all the telecom markets within its new geographic footprint — including in the UK, where it is aiming to merge its operations with Three — have been expanding in the past three years.
Dividends slashed
As I said, the other major announcement today related to the company’s new dividend policy as it shakes up its capital allocation policy.
Vodafone plans to pay another full-year dividend of 9 euro cents per share in the current financial year (to March 2023). However, it said payouts will be reduced to 4.5 cents from next year onwards.
This means shareholders will receive up to €3.1bn in total returns in financial 2025, representing €1.1bn in dividends and up to €2bn in share buybacks. This will represent a 23% increase in cumulative returns from this year.
The company also declared plans to “maintain a strong balance sheet” with a new leverage policy. Net debt to adjusted EBITDAaL will be set at 2.25 times to 2.75 times.
Good news
I myself have long been tempted to buy Vodafone shares for my portfolio. And today’s news has improved my appetite for the stock.
Its reduced footprint will allow Vodafone to deploy its capital more effectively and in better-performing markets. It will also sharpen the firm’s focus on the Vodafone Business, a key growth area and one where performance is steadily improving.
As chief executive Margherita Della Valle commented today: “Our B2B service revenue growth already reached 5% [between October and December] and we are gaining share against all our primary competitors.”
A stock I’m aiming to buy
Vodafone’s asset sales might be at an end. But the hard work isn’t over yet: the FTSE firm still has a lot to do to turn around its German operations. Service revenues had slumped following new laws on package bundling.
But trading here has been gaining momentum more recently, with revenues in its core region rising again in the December quarter.
Telecoms companies like this have terrific growth opportunities as the world becomes increasingly digitalised. And Vodafone’s transformation programme gives it an excellent chance to capitalise on this. I’ll be looking to buy the FTSE firm for my portfolio when I next have cash to invest.
