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Sorry to Disagree

Thursday, 24th July 2008

If Vodafone wanted to prove a point with its decision to spend £1bn buying back its own shares, it failed. The value of share buybacks is highly debatable at the best of times and while Vodafone shares are trading at low levels that doesn't necessarily make them cheap. It felt a little churlish for the company to announce the move the day after £11bn had been knocked off its market value after surprising the market with the extent of its poor trading in Spain.

Vodafone is placing a £1bn bet against the market and, in a bear market just getting going, that's quite a brave call. Any more bad news from its mature markets, where consumers are cutting back spending left, right and centre, will hit its shares hard again.

I sympathise with Vodafone's view that the market is undervaluing its shares and they are therefore a bargain. But I'm a firm believer that the role of management is to invest valuable cash in enhancing a company's operational performance (and even Vodafone has room for improvement) not to play the role of investment manager.

Er, no. The role of management is absolutely to be an investment manager. If they see no projects within the company which they can invest in which will generate a higher return than the cost of capital then they should indeed return that capital to investors.

That's what managers are hired for by the shareholders in the first place.