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]
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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