Vodafone (LSE: VOD) (NASDAQ: VOD.US) completed the sale of its 45% stake in Verizon Wireless to Verizon Communications on Monday. In total, shareholders will receive around 102p per Vodafone share, leaving many of us with a sizeable lump sum of cash in our portfolios.
The question, of course, is where to invest this money. My suggestion is that it should go back to where it came from: Vodafone. Before you stop reading in disgust, I’d like to make a couple of points:
1. Vodafone’s share consolidation means that the value of each shareholder’s holding has fallen by around 45%. Shareholders now have six shares for every 11 they had before. If you run a balanced portfolio, then your Vodafone holding will now be seriously underweight.
2. If you think that Vodafone is too unattractive to invest in, then why haven’t you sold the rest of your Vodafone shares?
Valuation remains attractive
Although Vodafone’s share price has performed strongly over the last year, the firm’s valuation remains attractive. Vodafone shares currently trade on a 2014 forecast P/E of 10.8, which rises to 14.0 for 2015, as the impact of the Verizon Wireless sale drops out of the figures.
Vodafone’s dividend yield also remains strong. The company has committed to a full-year dividend of 11p, which gives a prospective yield of 4.5%, comfortably in high-yield territory in today’s market. Dividend cover by earnings should also improve, thanks to the share consolidation.
Strengthened finances
Vodafone is keeping $46bn of the $130bn it has received for its stake in Verizon Wireless for its own use.
The firm will spend £7bn upgrading its existing networks as part of ‘Project Spring’, while yesterday it announced that it would redeem $5.6bn of outstanding debt, reducing its net debt by around 13%.
These measures should help improve organic growth, profits and cash flow, while leaving plenty of headroom for further acquisitions.
What’s next for Vodafone?
Vodafone is expected to acquire further European fixed-line assets, which should aid the firm’s move into content delivery and the enterprise space, both of which I see as growth areas in developed markets.
On the emerging market front, Vodafone’s African and Indian businesses should provide a solid foundation for long-term growth.
Finally, although AT&T has denied any intention of making a bid for Vodafone, it’s still possible, if not likely, and could provide a very profitable exit for Vodafone shareholders.