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ii view: Vodafone to return €4 billion following business rightsizing

Now concentrating on regions of growth with an increased emphasis on business customers. We assess prospects for this popular FTSE 100 company.

15th March 2024 11:42

Keith Bowman from interactive investor

Sale of Italian business to Swisscom for €8 billion

Chief executive Margherita Della Valle said:   

"Today, I am announcing the third and final step in the reshaping of our European operations. Our transactions in Italy and Spain will deliver €12 billion of upfront cash proceeds and we intend to return €4 billion to shareholders via buybacks, as part of our broader capital allocation review."

ii round-up:

Europe and Africa-focused mobile phone network provider Vodafone Group (LSE:VOD) has announced the planned return of €4 billion to shareholders via share buybacks following the sale of its Italian business to Swisscom for €8 billion. 

The deal follows both the sale and exit from the highly competitive Spanish market and raising its footprint in the UK with the merger of its home business and Three mobile. This leaves it focused on growing markets where it has a strong position. 

Shares in the FTSE 100 company rose 4% in UK trading having come into this latest news down by more than a quarter over the last year. That’s similar to UK rival BT Group (LSE:BT.A) and in contrast to a 5% increase for the FTSE 100 index itself over the last year.  

Having now completed the planned right-sizing of its business, Vodafone plans to leave its full year 2024 total dividend at 9 eurocents per share, then rebase the payment to 4.5 eurocents in 2025 and target subsequent increases after that. 

The total 2025 return to shareholders in 2025 which combines dividends and share buybacks is expected to total up to €3.1 billion - €1.1 billion in dividend payments and up to €2 billion in share buybacks - a 23% increase from the total 2024 shareholder return of €2.5 billion. 

In the financial year 2023, Vodafone Italy made a loss before tax of €49 million and the Spanish business a loss of €383 million. 

Selling the Italian business is expected to prove marginally accretive to adjusted earnings per share and dilutive on free cash flows. 

From April, Vodafone is changing the organisation to better execute on its strategic priorities, moving to the five divisions of Germany; European Markets; Africa; Vodafone Business; and Vodafone Investments.

The newly reorganised Vodafone will also increase its focus on business-to-business (B2B), or supporting businesses and public sector customers in their transition to the Cloud and generative AI.

Full-year 2024 results are scheduled to be announced on 14 May.  

ii view:

Conducting the first ever mobile phone call in the UK in 1985, Vodafone today operates both mobile phone and fixed broadband networks. Key countries of operation now include Germany, the UK, and South Africa, as well as partnering with more than 40 other mobile networks and providing one of the world's largest Internet of Things (IoT) platforms to connect devices. In Africa, its financial technology businesses serve more than 76 million customers across eight countries - managing more transactions than any other provider.

For investors, previous management expectations for current full-year profit to come in around flat year-over-year at €13.3 billion has room for improvement. The sale of its Italian and Spanish businesses leaves it less geographically diverse. Costs such as those for energy have remained elevated, while group net debt as at the September interim results was down at €36.24 billion (£31 billion), it still compares to a stock market value of £18.7 billion.

On the upside, business sales leave it more focused on existing areas of strength, and an ongoing transformation programme will further simplify operations. A strong focus on costs persists, while UAE telecommunications company e& continues to hold a sizeable shareholding in Vodafone, potentially applying further pressure on management for change.

Despite various programmes for performance improvement, a halving of the share price over the last five years offers room for caution, and Vodafone shares remain a speculative investment. However, management appears to be making progress and, even following a planned rebasing of the dividend, there's a forecast dividend yield of around 5% for 2025. A consensus analyst fair value estimate above 90p per share will also give investors hope.  

Positives

  • Business and geographical diversity
  • Ongoing management transformation programme

Negatives

  • High competition
  • Pending 2025 cut to the dividend payment

The average rating of stock market analysts:

Strong hold

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