This article has been adapted from our sister site across the pond, Fool U.K.
In other words, the group now finds itself with an extra 7 billion pounds burning a hole in its pocket.
Banking 7 billion pounds
On April 4, the telecom giant announced that, subject to approval from the relevant competition and regulatory authorities, Vodafone would sell its entire 44% shareholding in French mobile operator SFR to Vivendi, the media conglomerate.
Vodafone and SFR, however, did sign a "Partner Market agreement which will maintain their commercial co-operation." Vodafone will still have some involvement in the French mobile market, albeit at arm's length.
The deal leaves Vodafone with a cash windfall, and when that happens, CEOs tend to get dollar signs dancing in their eyes as they think about what to do with all this lovely loot.
Generally, company boards tend to splash this cash on:
- Ill-thought-out merger-and-acquisition activity, often overpaying for rival businesses.
- Share buybacks, thus boosting earnings per share by reducing their share bases.
- Returning capital to shareholders, often though the issue of "B" shares or loan notes.
- Boosting dividends or paying a special dividend.
For me, these options are ranked in order of attractiveness, with (1) being the least.
Show me the money!
I'm wary of CEOs spending shareholders' precious cash on ego-boosting M&A activity. All too often, this destroys shareholder value, as I warned in "The Worst Takeovers of All Time."
Second, there is little evidence that share buybacks make company owners richer, but they certainly benefit directors with fistfuls of share options. Multimillionaire investor Terry Smith is a fierce critic of share buybacks, as I recently made clear in "When Share Buybacks Go Bad."
Third, I've no real objections to having directors return capital to shareholders, such as the more than 1 billion pounds that investors in oil and gas engineer Wood Group (John) recently received after the sale of its well-support division to U.S. behemoth General Electric
Nevertheless, for me, there's nothing better than cash in hand, which is why I prefer higher dividends or a one-off special dividend every time. This leaves me free to decide what to do with my cash, rather than rely on directors to spend it wisely for me!
4 billion pounds on shares
Vodafone -- the U.K.'s third-largest company, with a market value exceeding 82 billion pounds -- has decided to go for option No. 2, through a 4 billion-pound program of share buybacks. Buying back 5% of its own shares isn't the best thing Vodafone's board could do with this new-found cash, but it's not the worst, either.
With Vodafone shares trading on a historic price-to-earnings ratio of 9.6 and paying a dividend yield of 5.6% (covered 1.9 times), Vodafone has a strong case for buying back these "value shares."
Indeed, I'd be happy to join Vodafone's board by buying its shares at their current level of 160 pence.
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