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QEV: how Vodafone’s capital return will shape markets

by Robert St George on Feb 12, 2014 at 11:40

QEV: how Vodafone’s capital return will shape markets

On 4 March Vodafone will distribute £52 billion to its shareholders, following their approval of the disposal of Verizon Wireless, a deluge of cash even sober market watchers have likened to quantitative easing (QE).

The headline amount – comprised of a £15 billion cash dividend and Verizon shares worth around £37 billion, a great deal of which will be sold immediately given the tax treatment of US shares – is an amount greater than the market capitalisation of giants like AstraZeneca, Rio Tinto, and Barclays. A £52 billion company would be among the 10 largest in the FTSE 100. The cash portion alone is more than the market capitalisation of BAE Systems, Legal & General, and Reed Elsevier.

Stephen Bailey of Liontrust’s macro-thematic team expects the flow of cash to have a significant effect on markets. ‘You could argue it is like having another dose of QE. The effect on the index is quite dramatic. For example, an index fund will have to purchase every other stock in the FTSE 100 to rebalance portfolios,’ he said.

While that process should buoy large-caps in general, it also stands to boost several sectors in particular. ‘The interesting side will be the re-investment from non-passive investors,’ explained Bailey.

‘You could argue that most holders of Vodafone do so because of an income bias. Therefore, if you hold Vodafone and you have a pot of cash coming back to you, where else can you invest for an above-average level of income? I think large oil and pharma will benefit.’

Citywire A-rated Michael Clark, manager of the £722 million Fidelity MoneyBuilder Dividend fund, also believes income seekers will plump for the ‘oil twins’ and healthcare titans. ‘There isn’t a shortage of alternative opportunities. It’s not going to be difficult to replace the income.’ Chris Kitchenham, a director at Walker Crips, agrees that those two sectors will attract a good deal of the money.

He and Clark moot HSBC as a possible destination too, especially for value-minded investors. ‘HSBC is the one because it already pays a dividend,’ Clark remarked of the banking sector. ‘For the others it’s more hope over experience.’ George Godber, manager of the Miton UK Value Opportunities fund, suggests Royal Mail as another probable home given its ‘fantastic dividend potential’.

Those interested in a like-for-like replacement telecoms stock have more limited options, although Godber cites BT as a ‘natural home’ for the Vodafone proceeds. Europe offers more obvious equivalents, with Godber having bought into Deutsche Telekom for example.

It too boasts an American asset – T-Mobile USA – that Godber believes is ‘under-reflected in the current share price’. However, he is sceptical of the broader European telecoms industry as they have ‘slightly scary capital structures and will probably needs rights issues’.

A more tangential winner from the Vodafone redeployment could be consumer discretionary names, Godber contends. An investor with £1,000 in Vodafone should receive around £500, which Godber compares to the cheques many received from PPI mis-selling. He notes that that ‘really manifested in the new car market’, and supposes that the Vodafone cash could similarly be spent on a new TV (particularly with the World Cup approaching) or a holiday, in which case stocks to back could be Dixons or Thomas Cook. But Clark points out that such options won’t match Vodafone for yield.

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