Which companies will benefit most from Vodafone’s cash bonanza?

Vodafone shareholders are about to receive a major cash injection.

That’s because their payoff from the Verizon Communications deal begins today.

In return for selling Vodafone’s stake in US mobile operator, Verizon Wireless, shareholders will receive roughly £50bn in cash and shares in Verizon Communications.

Shareholders will probably use most of the money to buy shares in other companies, so we may see some significant moves in share prices over the next few weeks.

And certain shares look set to benefit a lot more than others – here’s how you could take advantage…

How should you invest your Vodafone payout?

For each share they hold in Vodafone, shareholders are receiving 0.026 shares in Verizon Communications, currently worth 73p, as well as 30p in cash.

The Verizon shares will be credited today, the cash will be paid over the next fortnight.

The deal is sizeable enough that some people have referred to it as ‘Corporate QE,’ after the Bank of England’s money-printing scheme. The idea is that a lot of this money will go back into stocks, boosting the beneficiaries. And it might even give a lift to the economy. After all, some Vodafone shareholders may decide not to reinvest their cash, and spend it instead.

So is there a way we can profit from all this?

If you’re about to receive some shares in Verizon Communications, my advice would be to sell them. The company looks fairly valued, and it’s carrying a lot of debt.

But what should you do with the money? You may be tempted to invest some of the cash back into Vodafone.

I can see the attraction of that. The company is a potential bid target, it has a sizeable emerging markets business, and it pays a decent dividend. However, my concern with Vodafone is that, apart from Germany, it’s a mobile pure-play. In other words, it just provides services for mobile phones.

That’s a problem because that’s not the way the market is going. More and more customers across Europe are buying their mobile, broadband and pay-tv from the same supplier, and Vodafone can’t supply those customers.

Having bought a major German cable company last year, my worry is that Vodafone may want to buy more cable businesses soon. And it may overpay.

Institutional investors don’t have any choice

Of course, many institutional investors won’t have any choice in the matter. They’ll have to sell their Verizon shares whether they want to or not. If you’re running a passive fund that tracks the FTSE 100, you can’t own a US-listed company.

Many active managers will also be obliged to sell, as a US share won’t fit their mandate. Again, if you’re running a UK equity fund, that doesn’t leave room to hold Verizon.

So where will the institutions invest their spare cash instead?

The passive fund managers will end up putting most of their money in the largest stocks in the FTSE 100. That’s the way passive tracker funds work – the most money goes to the largest stocks. For the record, here are the current ten largest companies in the index:

Company Market Capitalisation Dividend Yield
Royal Dutch Shell £150bn 4.58%
HSBC £122bn 5.06%
Vodafone £111bn 4.55%
BHP Billiton £105bn 3.57%
BP £92bn 4.38%
GSK £81bn 4.63%
Unilever £69bn 3.73%
Rio Tinto £66bn 3.2%
British American Tobacco £59bn 4.37%
Royal Bank of Scotland £58bn

 

So we may see a modest share price boost for these big FTSE companies. However, you can’t assume this is a sure thing. If, say, the US markets start falling for whatever reason, I doubt the Vodafone cash will prevent similar declines in London.

Are there any better bets out there? Well, the more active managers may use their Vodafone cash to buy other large high-yield companies in London. Most of those who own Vodafone have likely been drawn to it at least partly for the dividend. If they’re going to redeploy cash elsewhere, they’ll be looking for other high yielders.

Company Market Capitalisation Dividend Yield
SSE (LSE: SSE) £13.8bn 5.99%
Resolution (LSE: RSL) £5.3bn 5.99%
Centrica (LSE: CNA) £16.3bn 5.3%
HSBC (LSE:HSBA) £123bn 5.06%
Morrison (LSE: MRW) £5.6bn 5.02%
BAE Systems (LSE: BA.) £13.1bn 5.02%
Imperial Tobacco (LSE: IMT) £22.9bn 4.93%
National Grid (LSE: NG) £31.1bn 4.89%
Sainsbury (LSE: SBRY) £6.7bn 4.82%
British American Tobacco (LSE: BATS) £14.6bn 4.7%

 

So we may see shares in the above companies benefit from Vodafone’s big payout.

Obviously, I wouldn’t buy any of these solely on the hope that a bit of money from Vodafone will make its way to these stocks. But if you’ve had your eye on any of them, now might be a good buying opportunity.

Of the ten, I’m most drawn to BAE and Imperial Tobacco. Granted, many countries are cutting their defence budgets, which isn’t good news for an arms business such as BAE. But the company trades on a price/earnings ratio of less than ten, and has a strong balance sheet. And governments will still want arms for as long as I’m on this earth.

As for Imperial Tobacco, it appeals because it has a large number of customers who are addicted to its products. Sure, e-cigarettes pose a threat, but I’m pretty sure that many folk will stick with their traditional tobacco fix. You can read more analysis on the tobacco sector from my colleague Phil Oakley . If you’re not already a subscriber, you can get your first three issues free here.

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