Can Vodafone Group Outperform Verizon Communications?

LONDON -- If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I'm going to use three key criteria -- value, income, and growth -- to compare companies to their sector peers. I've included some U.S. shares, as these provide U.K. investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

Today, I'm going to take a look at the U.K.'s largest mobile operator, Vodafone (LSE: VOD  ) (NASDAQ: VOD  ) and its U.S. partner, Verizon Communications (NYSE: VZ  ) . Vodafone and Verizon Communications each operate sizable businesses of their own, but they are linked through their joint ownership of Verizon Wireless, which has around 100 million subscribers and is the largest mobile operator in the USA.

1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks like a better value: Vodafone or Verizon Communications?

Value

Vodafone

Verizon

Current P/E*

19.3

40.3

Forward P/E

11.5

14.2

Price-to-book ratio

1.2

3.8

Price-to-sales ratio

1.9

1.1

*Calculated on a trailing-12-month basis.

Both Verizon and Vodafone have had a tough year that has eaten into their profit margins, resulting in surprisingly high P/E ratios on a trailing-twelve-month basis. Despite this, both have forward P/E ratios -- based on forecast earnings for 2012/13 -- that are well below the average for their respective indexes (the FTSE 100 and the Dow Jones).

On a value basis, Vodafone looks more attractive to me, due to its lower forward P/E and P/B ratios, although Verizon's low P/S ratio is also attractive -- as long as the company can convert a little more of that revenue into earnings.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do Vodafone and Verizon compare in terms of income?

Value

Vodafone

Verizon

Current dividend yield

5.6%

4.7%

5-year average historical yield

5.4%

5.3%

5-year dividend average growth rate

7.1%

4.0%

2013 forecast yield

5.7%

4.6%

Vodafone is a clear winner in the dividend stakes, offering higher historic and forward dividend yields and a higher five-year average rate of growth. Vodafone's superior dividend has largely been funded by the dividends it receives from its 45% stake in Verizon Wireless. This has turned out to be a fantastic investment for Vodafone and has protected its dividend over the last few years, during a period in which many big European telcos, such as Telefonica, have been forced to cut their dividend.

My only concern is that Vodafone isn't putting enough of its Verizon cash aside to fund the cost of upgrading its European networks to 4G. This could result in a sharp rise in net debt and place the company's dividend under pressure. One possible solution would be for Vodafone to sell its stake in Verizon Wireless -- but although Verizon Communications is known to be keen on acquiring the whole wireless operation, the two companies might find it difficult to agree a suitable price.

3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.

How do Vodafone and Verizon Communications shape up in terms of growth?

Value

Vodafone

Verizon

5-year EPS growth rate

6.4%

(16.7%)

5-year revenue growth rate

8.3%

4.4%

5-year share price return

(0.9%)

15.2%

Neither company can really claim to be a growth stock, but Vodafone has managed to deliver greater revenue and earnings growth over the last five years, making it the winner in this category. Despite this, Vodafone's share price has performed quite poorly, leaving the value of investors' holdings unchanged from five years ago in terms of capital growth.

Both companies face challenges
Both Verizon and Vodafone are facing headwinds in their separate businesses, and are relying heavily on the income generated by their joint venture, Verizon Wireless.

In Europe, Vodafone's operations in Spain and Italy have been hit hard by the deep recessions in these two countries -- revenue from its Southern Europe operations fell by almost 10% over the six months to the end of September 2012.

In the U.S., Verizon Communications' profits have been eroded by costs relating to storm damage from Hurricane Sandy, pension liabilities, and costs arising from the high costs of subsidizing smartphones like the Apple iPhone. In its most recent quarterly update, Verizon reported a net loss of $4.23 billion, double the $2.02 billion loss it reported for the same quarter a year earlier.

Both companies are promising tight control of costs and a better year in 2013, but the reality for both could be more of the same -- so which is most likely to outperform?

Should you buy Vodafone or Verizon?
As a Vodafone shareholder myself, I may be biased, but I would be happy to add to my Vodafone shareholding at the current price.

I reckon that in time, the company will deliver improved earnings from its European businesses, in addition to the more dynamic growth prospects offered by its emerging market operations. Vodafone has operations in India, Egypt, Turkey, Ghana, Fiji, and Qatar. These businesses accounted for 30% of Vodafone's revenue in the first half of the current financial year -- and I believe there's more to come.

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