If you are a holder of Vodafone (LSE: VOD) shares you are about to get a big payout. Vodafone sold its 45% stake in Verizon Wireless for $130bn, and its shareholders are going to receive $84bn (£51bn) of it – referred to as a return of value. This means that you have some decisions to make.
The whole procedure is quite complicated, but this is how we see it. Shareholders will receive around 74p in Verizon shares and 30p in cash (104p in total) for each Vodafone share that they hold.
If you want to keep the Verizon shares you will need to tell your stockbroker by 1pm on Thursday 20 February and fill in a W-8 form, which means that you will get taxed on any future Verizon (gross) dividends at 15%, rather than the US rate of 30%. If you do not inform your broker, the Verizon shares will be sold for you free of charge, providing that you own less than 50,000 Vodafone shares.
The other key decision is to choose whether to treat your return of value as capital or income. If you hold your shares in an Isa or Sipp then there is no tax issue.
Outside of a tax wrapper, if you are a basic-rate taxpayer and choose the income option then the 104p per share return of value will be treated exactly the same as a dividend. That is, 10% withholding tax will be deemed to have been paid and there will be no more tax to pay. Higher-rate and additional taxpayers will have to pay more tax.
Alternatively, you could choose to receive the return as capital. This means that if your gain is less than £10,900 (the current capital-gains tax allowance) there is no tax liability at all. Above this level, basic-rate taxpayers will pay 18% and higher-rate taxpayers 28%. All cash will be paid out on Tuesday 4 March.
If you need help deciding which option to choose, please consult a tax specialist. It is important to note that this return of value will not make you any better off. On Monday 24 February, Vodafone will consolidate the number of shares in order to give the same share price and earnings per share measures as before.
Let’s say that you currently own 10 Vodafone shares worth £2, and your total stake will be worth £20. To keep things simple, let’s assume the return of value is £1 (or £10 for ten shares). Normally a share price adjusts downwards after a dividend payment is made – in this case to £1 (£2 less £1 return of value).
To maintain the current share price what will happen is that the number of shares will be reduced to five to keep the share price at £2. So you will be left with £10 worth of shares (5 x £2) and £10 of cash – the same £20 as before. The number of shares you have after the consolidation will probably not be a nice whole number. All fractional shares you end up with will therefore be sold and returned to you as cash.
So is it still worth holding on to your remaining Vodafone shares? The business is not as attractive as it once was. Sales are declining in many parts of Europe and profits are under pressure. That said, Vodafone has plenty of cash to invest to improve its business and probably buy other ones.
Many analysts reckon that it is likely to buy fixed-line telephony assets across Europe, having already done so in Germany. Vodafone has been seen as a takeover target for the likes of US company AT&T, but it has ruled itself out of a bid for the next six months.
The company is pledging to keep on increasing dividends per share going forward. With a dividend yield of around 5%, the shares are probably worth hanging on to.