1 Special Dividend Opportunity

As I detailed in a recent article, I like looking for dividend catalysts as a way to drive stock performance in my Special Situations portfolio. And I think we have a great opportunity for that in shares of Vodafone (Nasdaq: VOD  ) .

Vodafone currently offers a 4.7% yield, a solid dividend from a telecom blue chip. But it looks as if there's plenty of room for upside on that dividend, which should drive the stock higher. The company pays out 55% of its free cash flow, but just 39% of its net income. In this case, that net income better measures the company's profitability. Vodafone consolidates income from its 45% stake in Verizon Wireless, but doesn't actually receive cash from the joint venture with Verizon (NYSE: VZ  ) . That could be about to change.

Verizon Wireless has nearly paid down its debt, meaning the JV can pay out dividends to its co-owners. Many have speculated that Verizon needs the cash for the buildout of operations in the U.S., and therefore would have the venture turn on the dividend spigot. This potential has hedge fund investor David Einhorn intrigued. Einhorn is also interested in Sprint Nextel (NYSE: S  ) , to the point of actually purchasing nearly 2% of its shares late last year.

Other analysts have speculated that Verizon would buy Vodafone's stake, a distinct possibility given that the U.K. giant wants to clean up its investment portfolio. Still others figure that a merger between Verizon and Vodafone could be in the works.

If Verizon Wireless did pay dividends, it would significantly increase what Vodafone could then pass comfortably on to its own shareholders. At a 6.4 EV/EBITDA multiple, shares of Vodafone are valued more highly than peers Verizon at 5.6 and AT&T (NYSE: T  ) at 6.2. But it also offers growth in emerging markets such as India.

Even better, Vodafone provides a better long-term play on high-yield telecom dividends than fading wireline plays such as Frontier Communications (NYSE: FTR  ) , CenturyLink (NYSE: CTL  ) , and Windstream (Nasdaq: WIN  ) . While these latter players pay from 7% on up right now, Vodafone has the potential to grow its 4.7% at a nice clip. And with its exposure to emerging markets, its business should have more room to run than these wireline players.

Still, with current yields on Frontier at quite high levels and not too far up on 52-week lows, it might be more interesting to have both Vodafone and Frontier in your portfolio, which is what I've done.

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Jim Royal, Ph.D., owns shares in Frontier and Vodafone. AT&T and Vodafone is a Motley Fool Inside Value recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 18, 2011, at 4:32 PM, FirstGratefulDad wrote:

    Sprint should be merging with Century Link, bring the Local Telephone Division back home. What better use of the massive amount of spectrum Sprint is sitting on then to support Century Link’s business model.

  • Report this Comment On April 18, 2011, at 5:31 PM, leekell wrote:

    Its about time ..seems V has been looking a gift horse in the mouth ..cant understand why vod let them go so long ..Vod should buy out v and put the bull to rest

  • Report this Comment On April 18, 2011, at 9:14 PM, Fool wrote:

    Jim -

    Could you explain how you calculated the FCF Yield of 55% for VOD?

    I'm accustomed to the formula (CFO-CapEx)/Mkt Cap.

    If this were the case, I obtained (13,064-6,975)/147,600, which resulted in a trailing FCF yield of 110%..

    I compare this to Vodafone's website, where they seem to be reporting Free Cash Flow a bit differently than I am used to: (CFO - Taxation + Divs from Investments - Divs to Subsidiaries - Interest Paid).

    Some help here?

  • Report this Comment On April 18, 2011, at 9:20 PM, Fool wrote:

    My apologies -- my formula written above is for the FCF Yield. Meant to say that I use the following for the FCF Payout Ratio:

    Div Payment Per Share/ [(CFO-CapEx)/Mkt Cap]

    Still come up with 110% Payout Ratio when using this one (FCF Yield is actually 4%).

  • Report this Comment On April 19, 2011, at 12:24 AM, bob3218 wrote:

    you say the yield on VOD is 4.7, yahoo says its 3.10?

  • Report this Comment On April 19, 2011, at 12:12 PM, energysystems wrote:

    bob-Most finance sites have a tough time accurately calculating dividends from companies(like VOD) who pay out a on a semi-annual basis.

    I'm a owner of VOD, and it's in my retirement portfolio. I seriously doubt Verizon buying out VODs stake in VW. Analysts have pegged that possible deal at around 100 billion, but that was prior to the large $$ thrown T-Mobiles way by ATT. Both Verizon and VOD execs are saying these issues will be cleared up this year. I'm hoping for a VW dividend.

  • Report this Comment On April 20, 2011, at 12:27 AM, TMFRoyal wrote:

    Hi, TXInvestor82,

    I see CFO at $19.8 bn and capex at $7.3 bn. My data provider lists common dividends paid at $6.9 bn. That all comes out to 55% FCF payout ratio. So we differ on the basic facts to begin with. Those numbers are roughly the ones reported on Yahoo, for instance. My data provider factors in historical exchange rates, so the numbers are slightly different, but not in any truly significant way.

    Hope this helps.

    Jim

  • Report this Comment On April 20, 2011, at 12:29 AM, TMFRoyal wrote:

    Hi, Bob,

    See energysystem's comments above.

    Jim

  • Report this Comment On April 20, 2011, at 12:36 AM, TMFRoyal wrote:

    Hi, energysystems,

    Yeah, I have a hard time believing that Verizon will buy out Vodafone, but perhaps AT&T's move was pre-emptive, trying to secure a deal for one of the last players, T-Mobile, before Verizon could act. With so few players left in the space, is Verizon now compelled to grow bigger by acquisition in order to maintain its position? And how would such a deal be financed? Well, we won't have long to wait...

    Jim

  • Report this Comment On April 21, 2011, at 12:36 AM, russellb73 wrote:

    Ummm has anyone else considered VOD may buyout VZ or just VZ's wireless?? VOD is bigger market value, dollar is weak to pound, VOD owns 45% of VZ mobile....much more likely I think VOD is the buyer.

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