I could spend time reviewing the earnings that Inside Value selection Vodafone (NYSE:VOD) just released, but I don't think they mean all that much right now. Certainly there are a few points that warrant mentioning, such as the dividends being paid out in the near future, but it's more important to focus on the direction that Vodafone is going, rather than where it came from.
That said, the results for the quarter do deserve a brief mention. They came in largely as expected: Revenue increased 9.6% to 41.4 billion British pounds, adjusted operating profits were up 11.4% to 9.4 billion pounds, and the company cranked out 6.4 billion pounds in free cash flow.
But the really interesting piece is the company's special dividend. Vodafone will pay out 9 billion British pounds in special dividends; 6 billion pounds had been announced as part of the sale of the company's Japanese business to SoftBank, and the other 3 billion pounds are part of the company repositioning its capital structure. Another part of this change is that Vodafone is now targeting a regular payout of 60% of its adjusted earnings. This target works out to about $1.13 per American Depositary Receipt and an annual yield of about 5% based on the current share price. For U.S. ADR holders, the special dividend will most likely come as a cash payout. For holders of the company's shares in London, the distribution will be made as B shares, which will allow shareholders some flexibility on timing and taxes for recognizing the distribution.
The new Vodafone is more about cost-cutting than it is about expansion and acquisitions, and more about returning cash to shareholders than it is about rapid growth. This makes sense given that mobile telecom is a very competitive business in most countries, and one where companies aren't afraid to compete on price to steal share. You can see it in the U.S. with Cingular, Sprint Nextel (NYSE:S), and Verizon Wireless, which is owned by Verizon (NYSE:VZ) and Vodafone. I've also seen it in Japan with NTT DoCoMo (NYSE:DCM), au, and the wireless business Vodafone sold to SoftBank. To a large extent, Vodafone is seeing a similar dynamic in Europe and has changed its strategy to focus on its market there to keep its strong position, from which it gets nearly 80% of its revenues and profits. Its other focus is emerging markets, where it is well-positioned to be profitable as well.
The one oddball at the moment is Verizon Wireless, which is quite profitable, but the CDMA technology it uses isn't compatible with the technology Vodafone uses in other markets. But Vodafone readily realizes that Verizon Wireless is profitable and still has room to grow, so for now, the company is content to be a minority partner in a business that earns good returns for its shareholders.
I haven't done a great deal of valuation work on Vodafone, but given how it's repositioning its business, its 5% yield, and its new strategy, I'm willing to take a look. Mobile telecommunications is not the no-brainer growth business that everyone thought it was, but realizing that fact and managing your business in line with that reality can create value.
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Nathan Parmelee owns shares in NTT DoCoMo, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
