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In my opinion, the current restructuring strategy is correct.
Concerning the merger, the UK business accounts for 15% of total Vodafone revenues; I guess that its share as a proportion of Vodafone entity value is similar. Let’s say that the merger can improve the value of the UK business by 20%: the entity value of Vodafone should increase by 3%, give or take.
In this regard, the decision concerning the merger does not look like a major issue, considering that other parts of the restructuring process (Italy and Spain) are well underway. Besides, the merger is not without risks; for instance, one should not underestimate the rhetoric against anything that has a link with China.
The last presentation says “FY24 total ordinary dividend expected to be maintained at 9.0c per share and ordinary dividend to be rebased to 4.5c per share from FY25 onwards”. As jesteh pointed out, that means that the next dividend should still be 4.5c.
Fleecy, yesterday you compared the “annual dividend savings” made possible by the buyback with the amount of money that Vodafone could earn if it banked 4Billion. While the comparison is purely theoretical, the figures are interesting.
In my opinion the two figures are not directly comparable, because one is after tax, the other one is before tax.
The annual dividend savings (€218,414,635) are after tax, because dividends are paid out of net earnings.
On the other side, I suppose that the amount that Vodafone could earn if it banked the 4B (€240,000,000) is before tax.
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.
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.
KevRow, I think there is a mistake.
You write:
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 worth £5million with 5 million shares worth £1 each.
It should be:
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.
Then there is a consequence for dividend payout. Assuming that the companies pays a dividend, every shareholder will continue to receive the same dividend, but the total dividend bill will be cut by half.
There is at least an important shareholder that certainly does not like the new strategy, and that is Xavier Niel. Probably he had bought puts to protect his investment in Vodafone and now he’s selling his stake.