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In Vodafone's case I believe share buybacks are probably the way to go, whereas I took a different view in the case of Lloyds with over twice the issued shares in circulation. I suppose the easiest way to decide whether or not buybacks are worthwhile, would be to determine how much they'll save in annual dividend payouts vs how much they could earn in interest by banking the €4 Billion.
Vodafone has 28,818,683,808 ordinary shares of which 1,739,701,451 ordinary shares are held in Treasury.
Dividend bill before buybacks would be:
(28,818,683,808 - 1,739,701,451) x 4.5 Eurocent = €1,218,554,206
Dividend bill after buybacks at 70p (€0.82) per share:
€4 Billion-0.5% =€3.98 Billion (stamp duty)
€3.98 Billion/0.82= 4,853,658,536 shares purchased
(27,078,982,357 - 4,853,658,536) = 22,225,323,821 shares in circulation after buyback
22,225,323,821 x 4.5 Eurocent = €1,000,139,571 annual dividend payout
Difference in dividend payment after buyback:
€1,218,554,206 - €1,000,139,571 = €218,414,635 (17.92% annual saving)
If they banked the €4 Billion, much would depend on the interest rate they could negotiate. I have no idea how much interest corporates can earn for loaning out their cash, but I'd guess it isn't without some risk. If they negotiated a return of 6% it would pull in around €240,000,000 a year in interest, which would probably be accounted for against how much they are paying out in interest on their debt and is more than they save in dividends from the buybacks.
Interest received and paid feeds directly into the Free Cashflow calculation, whereas dividend payments are deducted afterward and feeds directly into Net Debt. If Vodafone's share price goes up they'll get less shares from the buybacks, and I've also guessed the interest rate they might get if they banked the cash, and there may be very good reasons why they're better off with buybacks, so take everything I've typed with a pinch of salt.
I'll happily be corrected if I've misunderstood something, or got something wrong.
Elon could fork out 44 billion for Twitter 🙂
I agree re takeover being a remote possibility (hence the caveat in my wording) - Vodafone is way too big even for the largest PE houses to buy and forking £30bn would require a consortium of PE houses. Most likely scenario will be an acquisition by a peer (even that is remote) or Vodafone slimming down even further (perhaps selling Mpensa?) which would make the acquisition more palatable.
Nevertheless, I believe now we have bottomed out from a valuation perspective and I expect over the next few years Vodafone to produce fairly decent but unspectacular returns. I do have to say though that you should take my opinion with a grain of salt as i have always been a bullish on Voda (given sum of all parts valuation being lower than its individual businesses) which has resulted in me being early to the party with an average of around £1.
''Only people really gain are the directors on performance pay based on SP as their bonus go up without any efforts by them.''
oh no, another one out of the woodwork - seems to be an endless amount
The buybacks don't directly translate into equivalent high share price. It may add a small premium to underlying SP, but you should remember the £4b worth of assets are no longer there to bottom freed. Unless the return on the sold assets contributed significantly less than the remaining assets in pre capital basis, the SP raise would be lower. My guesstimate is about 10%. Only people really gain are the directors on performance pay based on SP as their bonus go up without any efforts by them.
"Namely - as Europe is overcoming recession, revenue will start growing quicker (with the added benefit of not wasting money keeping afloat section of the business that were underperforming i.e. Italy and Spain and releasing resources for additional investment where they earn their cost of capital), lower interest rates making debt burden easier to service, merger with three in the UK and overall more business friendly attitude by regulators and finally very cheap valuation which could result in a takeover deal."
I don't think any of those are out of the question, although I'm not sure who would want to buy Vodafone in it's entirety. Maybe private equity so they can asset strip. I definitely believe selling Vodafone Spain and Italy was the right thing to do as they would have only depreciated further in value under the current management.
" The buyback reduces the number of shares outstanding. Therefore, earnings per share go up. Everything else being equal, the price of the shares should go up. "
It isnt as simple as that in reality .... and of course everything else doesn't stay equal.... and the market knows what is going on ...the BOD will have to do more than just spend the company´s cash buying shares, to improve REAL earnings growth
The market will look alongside all this at ROCE,divisional earnings, market share , peer performance, and KPIs to properly judge the BOD performance
but yes, the BOD here have indicated they will invest more in the business , so yes..maybe the amount allocated for DIVS wont grow so much , but fewer shares keeps the div per share looking reasonable
Kev
''Assets sold to generate cash to buy back shares is viewed as zero sum?''
get your head into gear. The assets were generating nothing. The situation with the scale that Vodafone had in those markets may have meant that over the years the asset values could have kept diminishing to zero.
Money from the proceeds is being invested into assets that generate a return.
Namely - as Europe is overcoming recession, revenue will start growing quicker (with the added benefit of not wasting money keeping afloat section of the business that were underperforming i.e. Italy and Spain and releasing resources for additional investment where they earn their cost of capital), lower interest rates making debt burden easier to service, merger with three in the UK and overall more business friendly attitude by regulators and finally very cheap valuation which could result in a takeover deal.
Kev - buybacks haven't started, Italian asset not sold yet etc. You will not see an immediate impact on share price but rather a gradual one. The direction of travel will depend not on the buybacks as much as performance of the remaining assets. I think there are a couple of catalysts for Vodafone that could see it return to £1 of more.
-
"yes, it hasn't crashed from the halving of dividend, Italian sale and investing 4 Billion in Vodafone shares announcement"
It's more or less the same, so they have all just cancelled each other out? Assets sold to generate cash to buy back shares is viewed as zero sum?
Jest
'' look at their share price in last 5 days ''
yes, it hasn't crashed from the halving of dividend, Italian sale and investing 4 Billion in Vodafone shares announcement
Jest
''in the right hands those "worthless" assets will pay their way. Zegona and Swisscom know how to make it successful''
it is all about scale - if all the telco's operating in Spain and Italy merged then that certainly would be successful.
Good move to get out of Spain and Italy to invest in the rest of Vodafone
Kev
''It is still selling off an asset and using the cash to buy back your own shares rather than''
assets that have been of no benefit to shareholders - making no money. Proceeds investing in the rest of Vodafone is a wise move, removing shares that would have been eligible for a high yield return.
''but I'm not clear where the value that will translate into a share price increase''
you need better understanding - a buyback is carried out as a return to shareholders with the aim at reducing share capital. The market values Vodafone on a daily basis
''the belief that once the company is 4 billion lighter, it will be worth the same?''
the 4 billion was not getting any return - the 4 billion will now be getting a return for shareholders via the purchasing of shares. The cancellations will transfer the value to the remaining shares.
If profitability is maintained why should the value of the business drop?
"Providing profitability remains at least the same, then the money spent will be replenished, meaning that providing the market does not give a lower valuation to the business, and because shares are fewer in number, that would mean the price per share would be greater."
But the buy backs are not being funded with profits. They are being funded by selling off chunks of the business that won't be replenished.
According to the article being referred to:
https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company
"Contrary to the common wisdom, buybacks don’t create value by increasing earnings per share. The company has, after all, spent cash to purchase those shares, and investors will adjust their valuations to reflect the reductions in both cash and shares, thereby canceling out any earnings-per-share effect. If increasing earnings per share were the only rationale for buybacks, they would have no impact on value"
Kev
''But Vodafone will have 4 billion less cash afterwards, so why should it translate to a price increase?''
oh dear
''If I have a company worth £10 million and it has 10 millions shares at a £1 each, using £5 million of the companies cash to buy back 5 million shares means I'm left with a company worth £5million with 5 million shares worth £1 each.''
oh dear
Business valuations are based on assets and profits that can be generated. If a Billion is made via a dividend payment then that loss in assets is reflected in the share price immediately on xd day. The following profitability should then plug that asset gap made from the dividend payment. Buybacks for cancellation are assets (cash) leaving the business very slowly each day over a prolonged period. Providing profitability remains at least the same, then the money spent will be replenished, meaning that providing the market does not give a lower valuation to the business, and because shares are fewer in number, that would mean the price per share would be greater.
Pokerchips, I don't unserstand your point.
My point is very simple.
If a company does a buyback, this does not change the net earnings of the company.
The buyback reduces the number of shares outstanding.
Therefore, earnings per share go up.
Everything else being equal, the price of the shares should go up.
Dividends are a different issue.
If the company pays a dividend, it can keep the same dividend per share, while lowering the total dividend expense. This is another advantage of buybacks.
" the stock price should go up to £2, "
The profit amount would be the same and the allocation of profit to dividends would no doubt stay the same..
.. what you go up would be the div/share and that would be what you would end up paying more to obtain..
March 19 (Reuters) - Vodafone Group PLC (VOD.L):
* VODAFONE : VOXI BY VODAFONE HAS LAUNCHED A NEW LARGE LANGUAGE MODEL (LLM) GENERATIVE AI CHATBOT IN COLLABORATION WITH ACCENTURE
Only improved earnings and BOD performance really improve the SP...along with sentiment etc
Buybacks merely improve the div per share allocation of the total div pool amount
...but the initial total amount still has to come from earnings..
The Investment bankers/Option traders/shorters etc dont care about MCAP ...they merely trade on the likely achievement or not of any BOD guidance and key targets using macro sentiment etc
KenRow, I think Gohanito has already answered.
Anyhow, I had already prepared this example, therefore I post it.
Let’s assume that the market value of a company is £10 million.
There are 10 million shares; each share is worth £1.
Let’ assume that the net profit of the company is £1 million.
Therefore, P/E=10
Now let’s buy back shares worth £5 million. For simplicity, assume that the stock price doesn’t change during the buyback period. At the end of the buyback period, as you correctly says, the company has zero cash and has bought 5 million shares; let’s cancel those shares. Apparently, the result is a company worth £5 million (because cash is now zero), with 5 million shares, each worth £1.
However, the net profit of the company is still £1 million (there is no reason why that should change). That would imply P/E=5. For P/E to remain unchanged, the stock price should go up to £2,
However, it is reasonable to expect a stock price between £1 and £2, for two reasons: 1) the stock price will probably start to go up when the company starts the buyback, therefore fewer shares can be bought; 2) the company has less cash and therefore it is riskier.
KenRow - hopefully the below will prove helpful in understanding buybacks. You can never tell if buybacks will result in share price appreciation as these depends on a host of other factors besides the buyback.
https://hbr.org/2001/04/is-a-share-buyback-right-for-your-company
KenRow, my post was partly wrong, but the correct answer lies in between.
I’ll try to explain it later because I’m out for a walk.
"If I have a company worth £10 million and it has 10 million shares at a £1 each, using £5 million of the company’s cash to buy back 5 million shares means I'm left with a company still worth £10million (in the balance sheet of the company cash is substituted by the 5 million shares). The residual outstanding 5 million shares are now worth £2 each. "
In the scenario above, it sounds like the shares haven't been cancelled. It should like there would still be 10 million shares but the company would just own half of them?