This is a note to self to evaluate Vodafone’s decision to use their cash from Verizon Wireless this way.
Personally, I feel they don’t have to be obliged to pay out all cash flow to share holders.
At a time when European telco sans Deutsche Telekom is cutting dividends, keeping hold of the dividend make sense. 2 years of 2.4 bil amounts to one year of ordinary dividend.
However, the reality is that, unless you believe Vodafone shares are overvalued, a share buyback is the most effective way to return money to shareholders. It achieves the lasting benefit of decreasing the number of shares in issue, which in turn makes Vodafone’s regular dividend payments more sustainable. Either the company can pay the same dividend per share to a smaller number of shares, meaning it has more cash to spend on other things, or it can spend the same amount of cash paying dividends to the smaller number of shares, meaning the dividend per share can grow more than it might have done otherwise.
While the rest of Europe’s struggling telecoms sector is being forced into rights issues and dividend cuts, the retention of some of this latest Verizon distribution by not using it all for the buyback will strengthen Vodafone’s balance sheet. Like some sort of spoilt child, the market might want it all – and want it all now – but given the challenges many of its peers are facing it is tough to paint Vodafone’s windfall and ensuing buyback programme as a disappointment or bad news.
[Read Article | It is tough to paint Vodafone’s share buyback plans as a bad thing | Schroders]