How will Vodafone investors spend their Verizon cash?

Vodafone shareholders are benefiting from a £51 billion windfall thanks to the telecoms giant's Verizon deal. But how will they spend the cash?

The basics

Vodafone has received £79 billion from the sale of its stake in US arm Verizon Wireless to former partner Verizon Communications. It has decided to return £51 billion of this to shareholders.

Part of the £51 billion was paid in Verizon shares. Shareholders received 0.026 Verizon shares for every Vodafone share held on 24 February. Vodafone consolidated its shares at this time, with each shareholder receiving six new shares for every 11 previously held.

Shareholders will also receive 49c (29p) in cash for every Vodafone share held by 4 March.

If they wish to keep the money in the stockmarket, they can choose to do so by holding the Verizon shares and reinvesting the cash payout or selling the shares and reinvesting all of the money elsewhere.

Where will they invest?

Chris Beauchamp, market analyst at IG, believes that much of the money will return to Vodafone.

"Strong capital growth and a healthy dividend mean that this company will continue to retain a special place in the hearts of many," he comments.

Other stocks from the telecoms sector are likely to benefit from investors wishing to move out of Vodafone. Nik Stanojevic, equity analyst at wealth manager Brewin Dolphin, recommends BT "which has had good momentum on cost cutting/market positioning in recent years".

Strong capital growth and a healthy dividend mean that Vodafone will continue to retain a special place in the hearts of many."Chris Beauchamp

Stanojevic also suggests that there are a number of European telecoms companies which are worth considering due to restructuring opportunities.

These include Deutsche Telekom, which could still dispose of UK network EE despite putting plans for this on hold earlier in the month; Telecom Italia, which could restructure the Italian domestic business with money from a potential sale of TIM Brazil; and Dutch business KPN, which could improve its domestic business with cash from the sale of E-Plus Germany.

"Outside the telecoms sector, there may be some high-yield stocks which could benefit," Stanojevic concludes.

"The usual suspects screen best - pharma, utilities, insurance, supermarkets, oil and gas, although many have their own structural issues right now."

Popular high-yield stocks include pharmaceuticals businesses GlaxoSmithKline and AstaZeneca, utility National Grid and bank HSBC.

What are Interactive Investor users doing?

Many investors using Interactive Investor's trading platform appeared happy to stick with their initial investment, holding the Verizon shares and reinvesting in Vodafone.

Although investors were given the option to sell their Verizon stock immediately, Rebecca O'Keeffe, head of investment at Interactive Investor, comments: "Only 8% of our Verizon shareholders elected to sell their stock, with many more waiting to see what happens to the share price over the coming days and weeks."

One such investor is user 'exk8', who comments: "I am holding on to my Verizon shares for a bit as I think the share price will fall in the short term due to sales volume and then recover after four to six weeks. I will sell then as Interactive Investor doesn't support that tax exemption form [the W8-BEN] that has to be filled in."

My thinking is this, if Verizon does fall in the short term for obvious reasons, why not go against the tide and buy more?"'Norman Barrington'

'Norman Barrington' is willing to go one step further and buy more shares.

"My thinking is this, if Verizon does fall in the short term for obvious reasons, why not go against the tide and buy more?

"For many who stick with Verizon it makes sense to have a decent holding, and we may profit from the possible mass of sellers. If Vodafone rises steeply because of mass buying in, this is a possible sell to provide capital for buying Verizon.

"I think many of us who have filled out the W8-BEN should consider making US stocks a regular part of our portfolios; after all it's a small world."

'Betamax man' also plans to hold the Verizon shares for "exposure to the US".

Other investors plan to increase their holding in Vodafone, with 'dronaig' commenting that "growth and income" are the main attractions of the stock.

"I suspect, for the record, Vodafone will outperform with regard to growth," the user predicts.

However there are some who plan to move all of the proceeds of the deal into other stocks, including 'Sir Buns-Up Knealing', who comments: "One good choice would be HSBC which I have large holding in and expect a wave of this Vodafone money to migrate to."

Lesson for the future

While the Vodafone payment is a one-off occurrence, JPMorgan's head of UK intermediary sales, Michael Parsons, argues that investors should use it as a reminder to reinvest their dividends generally.

"Reinvested dividends have been the single biggest driver of equity returns in the UK, the US and Europe over the long-term," he says.

Reinvested dividends have been the single biggest driver of equity returns in the UK, the US and Europe over the long-term."Michael Parsons

"Investors tend to forget or overlook that income-oriented strategies can also be a source of capital growth."

JPMorgan global markets strategist David Lebovitz explains that reinvesting dividends can help investors generate better returns as the starting value at the beginning of a year is greater with the addition of the previous year's dividend, therefore any return will also be greater.

"This effect is amplified over time, as the power of compounding continues to contribute to the value of the investment each year, helping investors generate a superior return in the long run," he says.

"Thus, as investors think about how to allocate their portfolios, the power of compounding, and the effect that it can have on total returns, should not be forgotten."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.