Verizon Communications (NYSE: VZ ) shares are down more than 6% in 2010 while the Dow Jones industrial average is slightly positive. For investors who are attracted to its 6.4% dividend yield, Verizon may look like a pretty good buying opportunity. On the positive side, its forward price-to-earnings ratio looks relatively cheap at 12.8 and is trading near its 52-week low. Verizon's wireless business is generating a whopping $12 billion in free cash flow. Plus, rumors persist that the iPhone will finally come to Verizon in November or January. So Verizon's forward-looking valuation combined with the potential iPhone catalyst might argue that Verizon is a lock to outperform the Dow moving forward -- providing investors with both an attractive dividend and capital appreciation opportunity.
But hold on just a minute. On the negative side, Verizon's trailing price-to-earnings ratio looks positively expensive at 113, light years higher than the industry average of 18.2. And Verizon's payout ratio (the percentage of a company's net income that is used to pay its dividend) is listed at a whopping 728%. This suggests that Verizon will need to free up cash from its wireless business unit to maintain such an attractive dividend. But Verizon won't be able to grab all of the $12 billion because Vodafone (Nasdaq: VOD ) owns 45% of Verizon's wireless unit.
So color the situation for Verizon a bit murky. Will the positives lift Verizon's share price, or will the negatives create a drag on share prices and even put its healthy dividend at risk?
And the nominees are
Our 165,000-plus-member CAPS community views America Movil (Nasdaq: AMX ) , Latin America's largest mobile carrier, as a better opportunity among similarly sized companies in telecommunications. America Movil is a five-star stock (the highest rating given by our CAPS community), and Verizon currently stands as a four-star stock. CAPS member judged333 succinctly summarizes the general CAPS community sentiment in a February comment: "I'll tolerate the volatility for the potential growth this offers in an emerging market."
America Movil's forward P/E is 12.1 and trailing P/E is 14.3 (both better than Verizon), but provides a paltry 0.5% dividend yield. So, America Movil won't be attractive to the dividend investor, but it could be a better opportunity for capital appreciation. America Movil's free cash flow margin (defined as FCF / trailing-12-month revenue), is among the highest of its peer group, with 23% of its revenue turning into free cash flow (vs. 14% for Verizon). With plenty of growth potential in the emerging Latin American market, America Movil could have lots of upside. The company has been aggressively positioning itself to dominate the future 4G wireless network market in Mexico. And earlier this year, America Movil announced plans to acquire landline and broadband companies Telefonos de Mexico (NYSE: TMX ) and Telmex Internacional (NYSE: TII ) to offer bundled wireless, fixed-line, Internet, and TV. In June, America Movil assumed primary ownership of both companies. Whether America Movil delivers for shareholders probably depends on how successfully it integrates these two companies and whether the future 4G and wireless data are a catalyst for the next phase of growth in the business.
Another alternative for Verizon investors is Vodafone. As mentioned above, Vodafone owns 45% of Verizon's wireless business and stands to benefit handsomely when Verizon's wireless unit starts to put all that free cash flow back into the business. The stock offers a 5.6% dividend yield with a payout ratio of 48%. And Vodafone's current and forward P/E is about 9. Given that its valuation looks a bit more attractive than either Verizon or America Movil, Vodafone might provide the best combination of attractive dividend and attractive capital appreciation opportunity.
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