Bad news for just about every British pension holder on Tuesday morning as Vodafone shares fell 4.5 per cent following a set of disappointing first half results. Although the interim dividend was raised by seven per cent year-on-year, so shareholders are getting a bit of a sweetener but it's not enough. The company also said it would use $1.5bn of its $3.8bn cash dividend from its 45 per cent stake in Verizon Wireless on a share buy-back programme. From the FT (our emphasis): The market is unimpressed: The stock is down 11.1 per cent year-to-date, and 8.6 per cent since two years ago. From Will Draper and team at Espirito Santo: Interim results are weak on a number of measures including OSR, reported revenue, EBITDA and FCF. There is strength in VZW, which has allowed operating profit and EPS to come in ahead, and the dividend has been raised by 7%, which is unusual in the sector currently. The $8.5bn distribution from VZW is lower than we expected, although there is clear scope for more later... We are a little disappointed by the size of the dividend; we believe VZW has the capacity to pay much more, but clearly the shareholders have taken account of the cost of recent spectrum acquisition, and there is always the possibility of additional distributions mid-year in 2013. On that dividend, Lawrence Sugarman notes that changes in US tax law could hurt Vodafone: A further negative is that the reason for early payment is related to potential changes in the tax regime in the US which will make dividend payments less tax efficient and suggests future dividend payments by Verizon and hence payments from Verizon wireless could be lower. On a more positive note the payment has been made this year, and also there is no suggestion that the lower payment reflects concerns about the business outlook which remain good. The contrast between Vodafone's lacklustre performance and Verizon's strength has led to some merger speculation, with analysts encouraged by the 55-45 ownership structure of Verizon Wireless. As Quentin Webb at Breakingviews argues: Two years ago Vodafone was worth 1.6 times as much as Verizon; now the ratio is 1.04 times, with the UK firm worth $132 billion and its U.S. counterpart valued at $126 billion. Such shifts in fortunes can unblock stalemates. One option would be for Verizon to take full control of the wireless unit, which in total might be worth as much as $120 billion. But striking a deal this big without trashing Verizon's balance sheet requires an awkwardly large chunk of equity. Bernstein, the most recent advocate for a deal, suggests Verizon might need to give a 19 percent stake in itself to Vodafone, and give the UK group its minority stake in Vodafone Italy. The UK group would receive about $49 billion in cash but a walloping capital-gains bill could hand the tax man $20.2 billion. What's more, existing Verizon investors might cry foul at Vodafone's arrival at the top of the register. Another option could be a full Vodafone-Verizon merger, yet Verizon is unlikely to want to be exposed to the weak European markets that are currently dragging down Vodafone's profits. All in all, Webb thinks the status quo is going to endure, for now at least. After all, Verizon Wireless is expected to keep doling out the cash, perhaps as much as $6.8bn next year, says BofAML. Vodafone chief exec Vittorio Colao should be happy with that, and unlikely to want to to enter into a large disruptive merger having only recently finished tidying up other parts of his company. Related links: Vodafone sets £1.5bn buyback after £490m loss - FT C&WW&Voda - FT Alphaville