Vodafone Group Plc (VOD - Analyst Report) in its press release stated that it would receive $3.2 billion (£2.1 billion) in dividend payment from Verizon Wireless. Verizon Wireless, which is a joint venture between Verizon Communications (VZ - Analyst Report) and Vodafone, announced on May 13, that it has set aside $7 billion (£4.6 billion) for its stake owners. We believe the dividend from Verizon Wireless would boost Vodafone’s free cash flow, and thereby increase returns to its shareholders.
Vodafone expects the dividend to be paid by June end. The company, in its upcoming preliminary results announcement on May 2, would highlight plans to utilize the sum received.
Vodafone, the second largest carrier after China Mobile Limited (CHL - Snapshot Report), based on subscriber count, has significantly boosted it liquidity profile by venturing into profitable businesses, while divesting the less profitable ones. The company exited all minority holdings except Verizon Wireless, which has bright prospects.
Over the last two years, Vodafone realized about £15 billion from the sale of stakes in China Mobile, Softbank Corporation, SFR and Polkomtel. This divestiture strategy was aimed to capitalize prospects in the emerging markets. As a result, Vodafone expects EBITDA margins to stabilize in fiscal 2014 with continued cost efficiency, regional scale and improving margins in various markets including India.
Vodafone is also among the top dividend payers and rewarded its shareholders with regular dividends despite the ongoing economic weakness in Europe. In Nov 2012, the company announced an interim dividend of ???0.0327, up 7.2% year over year and consistent with its growth target of 7.0% through Mar 2013. In 2012, the company paid a dividend of ???2.440 per share, which was 10% higher than the 2011 dividend payment.
However, recent rumors suggest that the Vodafone might have to do away with its stakes in Verizon Wireless as Verizon Communication is gearing up to beef up its ownership in its wireless business. Verizon Wireless remains a lucrative source of dividend paymen for Vodafone. Last year, Vodafone received dividend of about $8 billion in two tranches after Verizon Wireless resumed it investor returns in 2011. Prior to this, Verizon ceased paying dividends since 2005 as it utilized the surplus for lowering debt levels.
However, given the rate of dividend returns of Verizon Wireless, it seems that losing stakes in Verizon Wireless would be expensive for Vodafone, as it might affect its investors. As a result, we believe that given the ongoing troubles with the European business and the nascent stage of business in emerging markets like India and Africa, the decision to part with its position in America would be a crucial move .
Vodafone, which operates with the other European telecom players like France T , has a Zacks Rank #3 (Hold).