When I first pondered the best reason for buying shares in Vodafone (LSE: VOD) (NASDAQ: VOD.US), for a while I did wonder if there actually was one.
You see, a decade ago I would have considered Vodafone in a similar way to BT Group — organically growing its business and keeping its dividends rising, while at the same time keeping an eye open for the odd bargain acquisition that might come along.
Today’s picture
But wind forward a few years, and Vodafone had become a good bit more acquisitive than its UK rival. We ended up where its stake inVerizon Wireless was its leading asset — at least, it was really all that anyone was paying attention to for a couple of years.
Then Vodafone sold out to Verizon Communications, providing shareholders with a very nice windfall.
But what about long-term sustainability? Well, I’ve already voiced my concerns about Vodafone’s weakening dividend policy in the wake of falling service revenues, and it left me not really sure of its priorities. Organic expansion of its 4G networks with the aim of boosting revenues and getting back to a progressive dividend policy? Setting itself up as a juicy target for a future takeover attempt? What?
That uncertainty has perhaps been clearing recently, with Vodafone back on the acquisition trail with a vengeance.
Snap them up
Since late July, we’ve seen the €7.2bn takeover of Ono of Spain and the €145m acquisition of Cobra Automotive Technologies in Italy, and Vodafone is also buying up 72.7% of Greece’s Hellas Online for €72.7m. The company has been negotiating plenty of fibre traffic sharing in various countries, too.
All this is resulting in substantial cash outflow, with Vodafone’s net debt up to £14.1bn by the end of the June quarter. That’s more than five times the company’s forecast pre-tax profit for the year to March 2015, and it’s really making it clear why Vodafone canned its previous commitment to rising dividends. In fact, forecast dividends for the next two years are set to be less than 60% covered by earnings.
The mooted bid interest from AT&T that followed the completion of the Verizon sale has faded away.
But there must be at least a couple of the world’s big telecoms companies keeping an eye on Vodafone and liking the way it’s doing the hard work of hoovering up smaller companies, forging those shared-network deals, and building something that’s worth more than the sum of its parts — and perhaps wondering what it might cost to buy it up when the time looks right?
I can’t see it happening any time soon, but I do think it’s perhaps the best reason to consider buying Vodafone shares — to get in before the company starts to look irresistible to a big fish with deep pockets.
It’ll cost you
It’s not my style, so I’ll be keeping away. But if you are tempted by the lure of possible future windfalls, do bear in mind that at 210p today the shares are on a lofty forward P/E of 32 — there’s already a lot of money staked on a future Vodafone windfall!