The Vodafone (LSE:VOD) share price opened 3% higher this morning (15 March) and, at the time of writing, is maintaining these gains. Investors appear pleased with the contents of a regulatory announcement that was released an hour earlier.
Early riser
Every morning at 7am, I quickly scan the London Stock Exchange website to check for notices about the shares I own. For a few short moments, I was excited when I saw that the FTSE 100 telecoms giant had released one with the headline: “Sale of Vodafone Italy and capital return“.
But then I realised what day it was. They say bad news is usually released on a Friday, hoping that it goes largely unnoticed with most people starting to wind down for the weekend.
Well, shareholders in the company are going to notice this one!
The devil in the detail
The sale of Vodafone’s Italian division has been on the cards for some time.
Along with its Spanish business, the return it generates is less than the cost of funding its operations. It therefore makes sense to exit these underperforming markets. In the words of the company’s management, this will help “right-size” the portfolio.
Conscious of the group’s huge borrowings, the directors have pledged a “new leverage policy“. This involves maintaining net debt to adjusted EBITDAaL (earnings before interest, tax, depreciation, and amortisation, after leases) within a range of 2.25-2.75.
But I’m slightly puzzled because, at 31 March 2023, the company’s leverage ratio was — at 2.5 — already comfortably within this target!
Personally, I was disappointed with the news that the dividend is to be cut, although it will remain at 9 euro cents for the year ended 31 March 2024 (FY24).
However in FY25, it will be halved to 4.5 euro cents. Most analysts were not expecting this. Prior to the announcement, the average of their 16 forecasts was for a dividend of 6.88 euro cents, with a range of 4.12 to 9.18 euro cents.
On the positive side, the company has stated its “ambition” to grow its payout over time.
Share buybacks
The directors have tried to soften the blow by announcing plans to buy some of the company’s shares. And this appears to have pleased the market. Personally, I’d rather have the cash in my hand.
Once the deal to sell Vodafone Spain is completed, the company plans to embark on a €2bn share buyback programme. This will be followed by another one, after the deal in Italy is concluded.
In FY25, shareholders will receive €1.1bn by way of ordinary dividends and the company will spend a further €2bn on its owns shares. The directors claim: “This represents a 23% increase over the expected total returns to shareholders for FY24 of €2.5 billion.“
Unfortunately, the €2bn won’t go as far now that the company’s share price has gone up!
Despite this increase, on paper, I think Vodafone still looks cheap. At 30 September 2023, its book value was €61.5bn (£52.6bn at current exchange rates) — nearly three times its current market cap.
This means it could be vulnerable to a takeover.
Maybe the next time I see a stock exchange announcement about Vodafone — hopefully, not one released on a Friday — it will have a similar effect on the company’s share price.
