The Best Dividend in Telecom Isn’t AT&T

The number one dividend stock isn't in the U.S., and offers a more than 7% dividend yield.

Jul 16, 2014 at 3:30PM

One of the highly anticipated mergers from earlier this year never came to fruition, but the company that was left out in the cold could still be a great investment. AT&T (NYSE:T) ended its pursuit of European telecom Vodafone (NASDAQ:VOD), ultimately deciding to buy DirecTV.

Shares of Vodafone had a nice run last year after the company sold its stake in Verizon Wireless to Verizon Communications (NYSE:VZ). Investors continued bidding up shares on the expectation that AT&T would buy the company. But shares of Vodafone are now down 13%, while Verizon and AT&T are up 4% and 5%, respectively.

One billionaire still loves Vodafone
Billionaire John Paulson made nearly $15 billion shorting subprime loans during the financial crisis. He specializes in merger arbitrage, focusing on takeovers. Lately, his merger arbitrage focus has been in the telecom sector, where mergers and acquisitions have picked up.

Among Paulson's notable wins have been Sprint Corporation after a bidding war erupted between Softbank and Dish Network. John Paulson also owned shares of MetroPCS before it was bought by T-Mobile. Paulson's other winner was Leap Wireless after AT&T bought the company. The fact that AT&T didn't buy Vodafone isn't discouraging to Paulson, though. He remains Vodafone's largest shareholder, with a $1 billion stake in the company. In digging deeper, it's easy to see why Paulson still loves Vodafone.

Vodafone going forward
After selling its stake in Verizon Wireless, Vodafone has been focused on rewarding its shareholders. Its 7.6% dividend yield is well above its major peers. Vodafone remains a global telecom giant. The company has operations in Europe, Africa, the Middle East, and in Asia. Many analysts now expect the company to use its strong balance sheet to go on an acquisition binge. The company will turn from prey to predator.

The potential to break into emerging markets is a big positive for Vodafone. It's doing this with partner agreements, which includes its partnership with Polkomtel to boost its Eastern Europe exposure. This allows Vodafone to expand into new faster-growing markets with little investment.

The U.S. leaders
AT&T's move to buy up DirecTV for nearly $50 billion is a big shift from the potential Vodafone acquisition, where AT&T will now have a big presence in the pay-TV market versus the European telecom market. The move will add 20 million subscribers to its video customer base, versus the current 5.7 million pay-TV customers that AT&T has. Assuming the deal goes through, AT&T will be the second-largest wireless company, and second largest pay-TV company.

Meanwhile, Verizon got a greater stronghold on the U.S. wireless market with its February acquisition of the remaining 45% stake in Verizon Wireless, which was previously owned by Vodafone. The $130-billion acquisition was one of the largest in telecom industry history.

How shares stack up
Vodafone trades at the highest P/E ratio of the three, but its P/S and P/B ratios are the lowest. Meanwhile, Vodafone has the lowest debt-to-equity ratio, and more than 25% of its market cap is covered by cash on the balance sheet. Verizon's dividend yield comes in the lowest of the three, at 4.3%, with AT&T at 5.1%. Vodafone is an impressive 7.6%.

Bottom line
The global rise in wireless is a big positive for the major telecom companies. While the likes of AT&T and Verizon are major players in the somewhat saturated U.S. market, Vodafone is looking to grow its presence in the faster-growing European markets. For investors looking for a high-yield investment in the telecom space, Vodafone is worth a closer look.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Vodafone. Try any of our Foolish newsletter services free for 30 days. 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.

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