It is well known that during the last three years, Vodafone has struggled to grow. Indeed, thanks to the tough economic situation in Europe as well as falling voice and messaging revenues within its key markets, Vodafone’s revenues have fallen 3% since 2011.
However, Vodafone’s US joint-venture Verizon Wireless has strengthened the company’s bottom line. In particular during Vodafone’s 2013 financial year, the company’s income before tax was $3.2 billion, of which $7.7 billion was from Wireless. This indicates that without the cash from Verizon, Vodafone would have made a full-year loss.
Still, Vodafone is now selling its holding in Verizon Wireless, receiving $130 billion in return.
Now, Vodafone is expected to return $84 billion to shareholders, through both a special dividend and shares in Verizon Communications. This should leave Vodafone with around $46 billion, or £29 billion to use as it sees fit.
However, it is not as simple as that as the majority of this £29 billion is in loan notes and shareholdings in existing joint ventures. When all is said and done, Vodafone will have around £22 billion to spend.
Of course, £22 billion is no small figure and this large sum gives the company plenty of options. However, Vodafone is already spending some of this cash buying up growth. In particular, the company recently spent £6.5 billion buying Kabel Deutschland, which will give Vodafone 32.4 million mobile, 5.0 million broadband and 7.6 million direct TV customers in Germany.
Still, even after this large expenditure, Vodafone will have £15.5 billion in cash left over to reduce debt.
Driving organic growth
But wait, as well as acquisitions, Vodafone already has several initiatives under way that are aiming to drive organic growth during the next few years. For example, Vodafone also plans to use £6 billion from the deal to back-stop ‘project spring’ a programme aiming to establish 4G coverage of 40% within Europe by 2015.
While to some this may seem like a fruitless expedition, Europe has one of the highest levels of smartphone penetration in the world.
Furthermore, after spending billions to acquire mobile spectrums in India last year, Vodafone has seen high double-digit growth within this market. What’s more, Vodafone is using this momentum to its advantage and is planning on boosting investment in the country to around £50 million annually to drive growth.
So overall, Vodafone’s use of the cash from the deal looks like it could boost the company’s growth. Project Spring, the acquisition of Kabel Deutschland and investment within India are three initiatives that could drag the company back to growth.
Having said all of that, Vodafone is well known for its strong dividend yield. However, if you feel that Vodafone does not fit into your portfolio and the company's prospects for growth are poor The Motely Fool's top analysts have selected this share as the Motley Fool's Top Income Share for 2013. With a dividend yield of 5.6% this company's dividend easily matches that of Vodafone.
>Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in Vodafone.