Vodafone (LSE: VOD) shareholders will likely be heaving a collective sigh of relief today because the full-year report hasn’t, so far, torpedoed the share price!
One of the highlights is that the directors have approved a plan to return capital via a share buyback of up to €2bn. The money will come from the proceeds of the sale of Vodafone Spain.
Restructuring to target growth
As I type (14 May), the stock is changing hands at around 71p. But the long decline since the end of 2017 has been grim for shareholders.
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However, last October when announcing the sale of Vodafone Spain, chief executive Margherita Della Valle said the move is “a key step in right-sizing our portfolio for growth”.
The company plans to focus resources in markets with “sustainable” structures and sufficient local scale. Spain had to go because the market had been challenging with structurally low returns.
We can only hope that the buyer — Zegona Communications – will be happy with its acquisition.
The directors’ turnaround plans also include the sale of Vodafone Italy. The company announced the disposal on 15 March and the buyer will be Swisscom AG.
The deal is worth €8bn in cash. But Vodafone will also provide “certain services” to Swisscom for up to five years. That arrangement will attract an annual charge of €350m from the first-year after the transaction.
Vodafone expects the deal to complete in the first half of 2025. The directors said in today’s report they anticipate the opportunity for further share buybacks of up to €2.0bn following conclusion of the sale.
Will the share price move higher?
So that’s the potential for around €4bn in buybacks announced today. But will it do shareholders any good?
Maybe. When a company buys back and cancels some of its own shares, the overall share-count decreases. Profits earned by the company are then allocated to fewer shares. That means the earnings-per-share figure will be greater than it would have been for a given amount of profit.
In theory, to maintain the price-to-earnings multiple, the share price will need to rise. But the theory can unravel if an underlying business is trading poorly with decreasing earnings and cash flows. Sometimes, a struggling business can still drag its share price lower.
Meanwhile, Vodafone’s overall business has been underperforming, and there are many negative figures in today’s report. However, the overall tone from the directors is one of optimistic determination to deliver a sustainable turnaround.
Nonetheless, the shareholder dividend is going lower.
The company said that following the “right-sizing” of the portfolio after the sales in Spain and Italy, there will be a new, rebased dividend from the current trading year ending March 2025.
The directors expect to deliver a dividend of 4.5 cents per share this year, down from 9 cents. That level is “sustainable”, they said, and ensures appropriate cash flow cover and flexibility for future reinvestment into the business.
There’s no doubt the Vodafone business is in a state of flux, and the accounts look messy. But sometimes enduring turnarounds can arise from painful restructuring, so I think the stock is worth investors’ deeper research and consideration now.
