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.
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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 andearnings per share measures as before.
Let's say that you currently own 10Vodafone shares worth £2, and yourtotal stake will be worth £20. To keepthings simple, let's assume the return ofvalue is £1 (or £10for ten shares).Normally a shareprice adjustsdownwardsafter a dividendpayment ismade in thiscase to £1 (£2 less £1 return of value).
To maintain the current share price whatwill happen is that the number of shareswill be reduced to five to keep the shareprice at £2. So you will be left with £10worth of shares (5 x £2) and £10 of cash the same £20 as before. The number ofshares you have after the consolidationwill probably not be a nice wholenumber. All fractional shares you end upwith will therefore be sold and returnedto you as cash.
Many analysts reckon that it islikely to buy fixed-line telephony assetsacross Europe, having already done soin Germany. Vodafone has been seenas a takeover target for the likes of UScompany AT&T, but it has ruled itselfout of a bid for the next six months.
The company is pledging to keep onincreasing dividends per share goingforward. With a dividend yield of around5%, the shares are probably worthhanging on to.
Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.
After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.
In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for Moneyweek in 2010.
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