Ringing endorsement - Vodafone has done a good job of rebuilding trust in recent years
While Vodafone’s latest results were generally well-received by the market, it is more interesting in our view to consider how the business has progressed since Vittorio Colao was appointed chief executive in July 2008. Back then the market was suspicious of Vodafone and, in particular, frustrated about the way it had been allocating capital over several years.
The company spent a lot of cash buying businesses overseas, in India and Turkey for example, which saw their fundamentals deteriorate rapidly soon after Vodafone took control. Further, while admittedly through no fault of its own – no cashflow was coming through from Verizon wireless, the US mobile phone network, in which it has a 45% stake. Overall, Vodafone was felt to lack management credibility.
Fast forward three years and Colao has done a lot to repair Vodafone’s reputation. The company has tidied up its portfolio of assets by selling stakes in businesses in China, France, Poland where it did not have control and was never likely to gain control.
Having achieved reasonable prices for these assets, Vodafone has returned the lion's share of the capital unlocked to shareholders in the form of share buybacks. also – albeit for reasons not directly attributable to the current CEO – it has once more started seeing some cashflow from Verizon wireless and, again, most of what it has received this year is being returned to shareholders as a special dividend worth £2bn. Furthermore, the company has committed to growing its ordinary dividend by 7% a year for three years, thereby increasing the cash coming back to shareholders through that route too.
All of this has come against a backdrop of difficult economic conditions in a number of its key markets, such as Italy and Spain. Obviously these are not easy markets to operate in at the moment but Vodafone has still done a decent job of delivering operationally, generating cashflow and then using it sensibly.
The big unresolved issue is the fate of the 45% stake in Verizon wireless. While the US business is performing very strongly and Vodafone is at least now seeing cashflow from it, the minority ownership situation will need to be addressed one way or another at some point. However with the current management team in place shareholders can have more confidence than at any time in the last decade that the decisions taken will be in their best interests.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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