Vodafone buy-back fails to impress sceptical market

Vodafone CEO Arun Sarin

Vodafone's efforts to impress shareholders with an annual rise in sales and earnings failed yesterday as the company's share price fell nearly 5 per cent, even though investors will receive at least £7bn this year in increased dividend payouts and a bigger than expected share buy-back programme.

Investors are worried about the outlook for growth and the company's prediction that underlying profits margins might be flat to down in the current year.

Vodafone also played down the possibility that it might increase its modest £8.3bn of net debt to gear up its strong balance sheet and hand even more cash back to shareholders through a special dividend.

Instead, Vodafone insisted it is still a growth company, with the main drivers of expansion being its nascent third-generation (3G) operations and its One Vodafone efficiency drive, aimed at generating up to £2.5bn of extra cash flow for the business from 2007-08.

Arun Sarin, the chief executive, said the group wanted to preserve its firepower for future deals. These will include taking full control of SFR, the French mobile business, which will involve buying out Vivendi Universal, and the outstanding shares in its Italian mobile business.

Mr Sarin also said now was not the time to sell its 45 per cent share in Verizon Wireless, the US mobile operator that contributed some of Vodafone's best results - another deal that some shareholders have encouraged to extract more cash from the world's biggest mobile operator.

"Verizon Wireless is producing 20 per cent growth on every metric, and the enterprise value of this business is growing at a rate faster than 20 per cent because of consolidation effects in the US. The equity value is going up at a fantastic pace. We will let this asset appreciate. In a year or two it could be worth double."

Despite Mr Sarin's upbeat assessment of the company's prospects, some analysts remain sceptical. Cazenove downgraded the shares from "outperform", while an analyst at Nomura, Mark James, said: "We wonder, post results, what catalysts there are to drive the share price higher."

Average revenue per customer continued to fall in the company's main European markets such as Germany and the UK and were flat in Italy. It was forced to take a £315m impairment charge on the value of its Swedish assets as a result of intense competition in the market. Only Spain showed significant growth.

Vodafone also gave more details of its turnaround plan in Japan where it has seen its new customer figures collapse after misjudging the introduction of its 3G services.

Overall sales of mobile phones rose 5 per cent to £33.2bn, while earnings per share increased 14 per cent to 10.41p. The company declared a final dividend of 2.16p, making a total dividend of 4.07p worth £2.7bn.

Having bought back £4bn of shares in the year, Vodafone announced it would be repurchasing a further £4.5bn this year.

- INDEPENDENT