INTRODUCTION ABOUT STOCK REPURCHASING
With the increasing size of companies the style of business and their structure is changing. Structure of multinational corporations depends on the style of their business and on their sources of finance. Sources of funds are broadly classified into two categories, namely debt funding where the company pays a fix amount of interest and equity where the company pays a share from profit or losses (Whalley and Curwen, 2012). Equity funds are raised from market in the form of shares, where a company issues a large number of shares with the equivalent partnership into firms. Here in this current research assignment report the researcher will discuss about the concept of stock repurchase with respect to Vodafone.
VODAFONE: A BRIEF OVERVIEW
Vodafone is a multinational telecom company with its headquarteres in London. It ranks second in the global telecom companies in terms of subscribers and also revenues. Apart from telecommunication it is also engaged in internet services, digital television etc. Vodafone has its operations in around 70 countries across the world. Vodafone is public limited company which is primarily listed on the LSE and has market capitalization of more than 90 billion. Vodafone’s annual profits in year 2012 were 6.957 billion. It is one of the biggest employers by creating employment opportunities for more than 85000 employees (About Vodafone, 2013). Vodafone strategy for operating business is appropriate, they try to achieve corporate social responsibility, by taking into consideration their employees, customers, suppliers and also their stakeholders. The current prices of share 2.08 also their annual dividends paid in year 2012 were 13.52 pence which was almost 50% more than the dividends paid in previous year (Vodafone Group PLC VODPF, 2013).
Vodafone due to its brand image and their huge profits become the favorable choice for the research based on the Stock Repurchase. Another reason for choosing Vodafone is that their performance on stock market (LSE and NASDAQ) is average as compared to their profits, company also pays annual dividend and thus stock repurchase is also a technique which will raise the share value of the company.
Stock Repurchase: It is the techniques used by the companies where they buy back their own shares and try to reduce the number of outstanding shares in market. This technique is adopted by the company when they find that their share value is undervalued. When the company repurchases the shares there is an increase in the earning per share and thus share value is increased. Company repurchases their shares by offering a fixed price to their shareholders.
Stock Summary of Vodafone: Here are the various calculations related to the stock of the company, all these calculations are based on the financial performance of Vodafone of year 2012-13, which are described in appendix:
1.Current Earning per share, it is the amount of profits allocated by the company on the number of outstanding shares, it is basically the measure of company’s profitability
EPS = Net Income - Dividend paid on preferred stock / outstanding shares
Total Earnings: 6957 million
Current number of share outstanding = 50958
PE Ratio is the ratio current value of share in market with respect to earning per share (Palmer, 2010). Vodafone share is currently listed at 2.08.
The average PE ratio is 20-25 times of the earning here it is 16 which is low (Morley, 2010).
2.It is advised that a there is a repurchase of the 10% of outstanding shares of the company, thus after purchasing number of shares which remain outstanding will be 45862.
3.Thus EPS will be:
And the new PE ratio will be
PE Ratio of B * New EPS. Thus the stock price after repurchase will rise from 2.08 to 2.4.
Vodafone current stock price is 2.08 and thus if their stocks are repurchased their price will rise to 2.4, thus it can be concluded that this technique of stock repurchase is the favorable technique for the company which feels that their stocks are undervalued and similarly Vodafone must re purchase their outstanding stocks.
- About Vodafone. (2013).
- Morley, M.F. (2010). Ratio analysis. Scotland: Gee & Co.
- Palmer, J.E. (2010). Financial Ratio Analysis. American Institute of Certified Public Accountants.
- Vodafone Group PLC VODPF. (2013).
- Whalley, J. and Curwen, P. (2012). Third time lucky? An exploration of Hutchison Whampoa's involvement in the mobile telecommunications industry. 14 (2) pp.17 – 41.