Vodafone unveils £2.5bn buy-back of shares as free cash flow increases

Vodafone, the world's leading mobile phone group, yesterday announced its first share buy-back programme, which will return £2.5bn to shareholders over the next 12 months. It also revealed a 20 per cent increase in its dividend payout for the first half of its financial year.

Arun Sarin, the chief executive, hailed the company's 61 per cent growth in its free cash flow to £4.6bn as the centrepiece of an "outstanding" set of interim results for the six months ending in September.

As well as funding the share buy-back and its £650m interim dividend payout, Mr Sarin said free cash flow would also be called upon to pay a £1bn tax bill due in the second half. "The tax bill in the first half was £300m and in the second half it will be £1bn. That's just the way these things fall," he said.

Turnover increased by 13 per cent in the first half to £16.9bn. Underlying profit rose 26 per cent to £5.4bn, although the company made a £4.3bn pre-tax loss because of goodwill amortisation.

It carries £90bn of goodwill on its balance sheet, which it is amortising at £14bn a year.

Mr Sarin also announced that Vodafone would be launching the first full commercial trials of its new third-generation (3G) mobile phones in December. The company will be holding talks with a number of potential handset manufacturers to supply phones for a wider roll-out later next year. He said trials would start in all its main markets, including the UK, but stressed that Vodafone would not rush into the new technology.

On Tuesday, Hutchison Whampoa, the Hong Kong owner of the 3 third-generation network, warned it would not break even until 2006, more than a year later than expected, because of a delay in the delivery of handsets.

Vodafone will spend £2bn this year on developing its 3G business, having already spent a similar amount last year.

Mr Sarin told the company's interim results meeting in London yesterday that Vodafone would not risk losing customers by launching 3G services until the technology had been proven. "We will launch 3G when its ready," he said. "We have got 125 million customers. These are happy customers. We do not want to chase extra revenues from 3G at the risk of losing our existing revenues from all those happy customers."

Recent media reports have suggested that Nokia, the world's leading handset manufacturer, would lose out to Japanese competitors when it came to Vodafone placing orders for new 3G handsets.

However, Julian Horn-Smith, the chief operating officer of Vodafone, said 3G handsets would not be exclusively sourced in Japan. "I am not sure where we will get them," he said. "Whoever can deliver will get the business. They will not all be Japanese. Nokia is one of the options."