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Telecoms are often a significant part of the income investor's portfolio for a couple reasons. This is because they tend to offer high dividend yields with the stability of an established and well-recognized business.
But the biggest telecoms in the US and Europe are up in the air right now. One company has sold disparate assets, and another has taken out lots of debt to buy back full control of its business, and finally one is now looking to acquire overseas. .
Just last month British based global telecom Vodafone (NASDAQ: VOD ) announced it would sell its 45% ownership stake in Verizon Wireless back to parent company Verizon (NYSE: VZ ) . Vodafone's stake went for a whopping $130 billion, making it the third-biggest corporate deal of all time. This earth-shaking move marks Vodafone's exit from the U.S. as well as Verizon finally being in full control of its own destiny.
Like any tremor there are a number of aftershocks in its wake: A flurry of smaller deals and other mergers in the telecom picture are now underway. There is uncertainty in an industry known to be anything but. This article will look at some of these major changes, so that income investors may get a better handle on what they are entering.
Vodafone and Verizon: A tale of two cities
Let's start with Vodafone, that has gone from a truly global telecom to just a European-emerging market play. Verizon Wireless was a very important part of Vodafone's business. Without Verizon Wireless, Vodafone's revenue, weighed down by not just southern Europe, but also the UK and Germany that have been shrinking for the last 18 months.
Vodafone, previously a "no nonsense" prepaid voice and SMS provider, will have to work to regain relevance among consumers in Europe, who now prefer a convergence of 3G, cable TV, and high speed Internet. Only by becoming a more integrated "one stop" provider will Vodafone turn around its revenue per user numbers into growth again.
Thankfully, this company now has a huge war chest to do just that, and is working on building its fiber optic network across Europe and acquiring smaller cable providers. Nevertheless, Vodafone faces a tough situation in Europe and is now small enough that it could be an acquisition target itself.
The biggest chunk of the proceeds from the Verizon deal, over 70%, will go back to shareholders in the form of a special dividend and also Verizon shares. And $20 billion of it will be spent on debt repayment.
While Vodafone is slimmed down and paying off debt, Verizon is going in just the opposite direction. To buy the remaining stake of Verizon Wireless, Verizon has had to make the largest corporate debt offering of all time. It may well have been worth it: Unlike most of Europe, US telecoms are still growing revenue steadily, and Verizon now has full control over the best 3G and 4G market.
Despite all the debt, Verizon now has a focused business that is steadily growing. That's exactly what dividend investors should be looking for.
The dark horse: AT&T
The unknown factor here is actually AT&T (NYSE: T ) . Management has explicitly stated it is interested in buying in Europe, where it believes assets are cheap. The rumor is that Vodafone is actually its primary target, which might explain why Vodafone shares have gone up and AT&T's have come down.
Right now AT&T probably has the second strongest 3G-4G network in the US. And while its growth has been a bit slower than Verizon's, AT&T has done a good job with the "UVerse" cable TV, Internet and telecommunications bundle.
The biggest concern, and likely the reason for its shares' relative underperformance, is this: A lack of focus upon any huge Europe transaction. Take 2011 as an example, when management was so preoccupied with the T-Mobile acquisition that it dropped the ball on its 3G and 4G buildout, thereby giving Verizon the lead which it has. Could this be a repeat?
Foolish bottom line
Even though we don't know exactly what the future holds for the above three names, all three are well managed companies. Vodafone shares this year have jumped 38% only going higher in anticipation of a massive special dividend and distribution of Verizon shares, both of which will total to over $80 billion. But given Vodafone's challenge in Europe, one needs to be cautious in light of how far the stock has run.
By valuation AT&T is the cheapest of the three. That's because the market does not like the prospect of AT&T entering Europe. Even if assets in Europe are cheap, as management seems to believe, it will be entering a slow to no-growth market where it has no previous experience.
Verizon is down $3 per share on the year and it may drop more as UK brokerages are forced to sell the Verizon shares they receive from the Verizon Wireless transaction. If so that's an opportunity to buy. Right now, Verizon is the most expensive of the three. However, with a leading brand and a strong focus on just one geography, it is also in the best position for steady growth into the future.
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