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Vodafone’s Verizon deal: what it really means for investors

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
30/08/2013

Vodafone investors could be in line for a bumper payday after the mobile phone giant confirmed yesterday it was in talks to sell its 45% stake in US firm, Verizon Wireless.

Following Thursday’s confirmation Vodafone’s shares soared 9% to a 12-year high and the impressive gains continued this morning.

But what does this all mean for investors?

Hargreaves Lansdown, the stockbrokers, said that if Verizon is sold for $130bn – the reported figure- this would be worth around £84bn to Vodafone shareholders or 174p per share. Vodafone could pay out around £40bn as a special dividend which amounts to 83p per share.

With this in mind, an investor holding £5,000 of Vodafone shares could be in line to receive £2,000, with no further tax to pay if the shares are held within an ISA or SIPP.

Following a difficult summer for investors, the prospect of holding an investment heavyweight with a bumper dividend pay-out potential is likely to make many sit up and take notice.

However, yesterday’s announcement should not be seen as a straight and easy path to solid returns.

According to Adrian Lowcock, senior investment manager at Hargreaves Lansdown, Verizon Wireless is a key contributor to Vodafone’s profits and while dividends could be boosted in the shorter term, investors could see lower yields in the longer term.

Vodafone has enjoyed bumper profits off the back of Verizon in the past decade as the US has been a key growth area, a contrast to the more challenging European market.

If the deal goes ahead, Vodafone’s key business region will be Europe, which means the business will face the continued challenges coming from the region.

Economic conditions in some emerging markets have also recently become more challenging. Uncertainty over the outlook for the Indian economy has risen over the past few weeks, which could mean bad news for Vodafone which retains a significant presence in the country.

It is also worth noting that discussions between Vodafone and Verizon Communications have been on and off for some time. Vodafone management said yesterday that “there is no certainty that an agreement will be reached”.

But if the deal to sell Verizon does go head, it also has the potential to give Vodafone the leverage it needs to concentrate on other parts of its business, and most importantly to investors – while returning some of the cash to its shareholders.

All in all, City analysts are largely positive over Vodafone’s prospects, and shareholders have responded in kind.

If the Verizon sell-off is successful, Vodafone stands in a unique position of being able to play with a large chunk of cash to bolster its business elsewhere, and should continue to profit so long as there are no major shocks in the regulatory environment awaiting the European telecoms industry.

The Share Centre’s economist Helal Miah, says: “We continue to recommend Vodafone as a ‘buy’ for income seekers and believe in the short to medium term dividends will remain competitive.” Vodafone is currently one of the biggest dividend payers in the FTSE 100 and has an attractive yield of around 5%.

 

 

Funds which have the largest exposure to Vodafone
Fund %
Legal & General Ethical R Inc 9.68
Scottish Widows UK All Share Tracker I Acc 9.63
Fidelity Funds – Global Telecoms A-GBP 9.40
RWC Income Opportunities A GBP 8.35
UBS UK Equity Income A Net Acc 7.44
Waverton UK A GBP 7.38
JPM UK Managed Equity A Acc 6.64
Elite Charteris Premium Income R Inc 6.61
Standard Life Inv UK Equity High Income Ret Acc 6.61
PSigma UK Growth Inc 6.58

 

 Source: Lipper Hindsight