What to do with Vodafone (LSE: VOD) (NASDAQ: VOD.US) shares is a tricky question right now. I’d felt for some time that Vodafone was a value stock and no longer an income stock: its free cash flow was heading downwards and its dividend payments were reliant on dividends from US joint venture Verizon Wireless (VZW). Now the value of that has been outed through the planned sale of Vodafone’s interest to Verizon.
The upside
The case for staying invested is:
- Though a smaller company, ‘New Vodafone’ should be a decent income stock: management is projecting dividends that should equate to around a 5% yield;
- The new strategy – acquiring and building cable assets to offer a ‘quad play’ combination of mobile and broadband services to both consumers and enterprises – looks logical and attractive. The acquisition of Kabel Deutschland is a good start, and there are other European assets available to build scale rapidly;
Shrunken in size, Vodafone could become a bid target itself. That would reward investors with a double whammy of bid premiums, one for the VZW stake and one for Vodafone itself. Only last week HSBC‘s analysts speculated that AT&T could be interested in Vodafone, arguing that intensified competition in the US would make it look to Europe to grow.
The downside
On the other hand, most of the value of Vodafone’s excellent deal to sell its VZW stake should now be in the price of Vodafone’s own shares. They might drift upwards as the transaction approaches completion, but picture is complicated by the sale price formula depending on the price of Verizon shares.
So there’s an argument to take profits by selling Vodafone shares now:
- The success of the new strategy depends on successful execution. There’s considerable risk in making and integrating suitable acquisitions;
- Vodafone’s history of overpaying for acquisitions was under different management, but I do worry that the company will now feel hurried to do deals – not least to stave off being acquired – and that could make them overpay.
The clincher
It’s uncertain what the new Vodafone will look like, so it’s a finely poised decision. The clincher for me was big share sales from the CFO and the Chief Technology Officer. Both recently sold a third of their holdings at 213p-214p, raising £2.6m and £1.4m respectively.
That sends a sign. I followed suit and have taken profits on a third of my holding, and am watching the situation closely.
