Some people were disappointed by the size of their ‘windfall’ from the $130 billion sale of Verizon Wireless by Vodafone (LSE: VOD) (NASDAQ: VOD.US), but I wasn’t complaining. With dividends reinvested, I nearly doubled my money in the five years or so that I held the stock.
Buying Vodafone was one of my better investment decisions. With Vodafone now offloading its prize asset, selling it in March feels like an even better decision.
It is never wrong to bank a profit, they say, and you certainly feel better about it if the stock subsequently falls 10%s, as Vodafone has just done. Its full-year results were a disappointment for those who have held onto it, with write-downs of £6.6 billion in Germany, Spain, Portugal, Czech Republic and Romania. The weak European economy, stringent regulation and tough competition saw a 9.1% drop in service revenues.
Passage To India
Stripping out the Verizon disposal, Vodafone made a pre-tax loss on continuing operations of £5.3bn, as profits continue to head in the wrong direction. Chief executive Vittorio Colao has a job on his hands turning this round, but there is some good news, with rising emerging market sales, particularly in India, easing European losses, and the company continuing to generate enormous cash flows.
By selling the stock, I could be missing out on some exciting deal-making, as Vodafone used the Verizon payout to fund a massive investment programme. It is putting its windfall to work by expanding into TV and internet, and developing high-speed mobile.
Vodafone bought Germany’s Kabel Deutschland for £6 billion last year, Spanish operator Ono for £6 billion in March, and has been on a shopping spree in India. Lately, there have even been rumours of a bid for BSkyB. The two are already partners, with Vodafone mobile customers able to see Sky Sports content on mobile phones.
Spring Offensive
My worry is that the costly £19 billion Project Spring investment programme will eat into profits, which could fall again next year. It will also add another layer of certainty, because it is easy to blow money when you get a lot of it at once.
I also worry that so much stuff is given away free these days, particularly messaging services and other online apps, and it could get harder and harder to get people to pay for this stuff.
This is an intensely competitive area, and Vodafone is pursuing an expensive, high-risk strategy, while borrowing money to do it. Credit ratings agency Moody’s recently threatened to downgrade Vodafone’s credit rating, unless it beefs up its its balance sheet. That’s something else I no longer have to worry about.
I’ll Miss That Income
I will miss Vodafone, especially its yield, which is currently 5.3%, recently upped a progressive 8%. For buyers, its valuation doesn’t look too onerous, either, at 11.8 times earnings. But I reckon Vodafone has a challenging couple of years ahead of it, as it tries to generate a return on its investment programme.
A generous dividend may be enough reward for some, but I’ve had my fun with Vodafone — now I’m off in search of more exciting growth prospects.
