The Vodafone Group Plc Demerger: What About Verizon Communications Inc.?

Should you sell, hold or buy some more of your Verizon Communication Inc. (NYSE: VZ) shares?

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vodafoneSo the Vodafone (LSE: VOD) (NASDAQ: VOD.US) demerger has just taken place. This means that Vodafone shareholders are left with fewer Vodafone shares, some cash, and some Verizon Communications (NYSE: VZ.US) shares.

There has been much discussion about the Vodafone part of this deal, but what about the Verizon shares? After all, this demerger has left Vodafone shareholders with a substantial amount of stock in the US phone company. I suspect that this is by far the highest value of US shares ever held by UK investors. So, should you sell, hold or buy some more of these shares?

The company looks cheap

The story of Verizon is a tale of a whole series of corporate mergers, takeovers and demergers. At the turn of the millennium, Bell Atlantic announced a wireless venture with what was then Vodafone Airtouch, which they called Verizon. Then in 2005 Verizon acquired MCI. And now Verizon has acquired the part of its assets that were held by Vodafone.

The resulting company is the largest telecoms company in the States, with a market cap of $197 billion — its only peer on a global scale is China Mobile. The bulk of its business is wireless, but it also has a substantial fixed-line business.

What about valuation? Well the newly merged company is on a P/E ratio of 11, which makes the company look fairly cheap, if you compare it with the S&P 500 average of 18. There is also a dividend yield of 4.4%.

But there is a lot of debt

So Verizon looks cheap, but there is one crucial proviso: debt. The Vodafone deal means that Verizon is now a heavily endebted company, with a total debt of (I make it) some $113 billion, equivalent to the national debt of a small country.

These numbers are gargantuan, and the complexities of the Vodafone deal make Verizon rather difficult to value.

This is a very profitable company, which dominates the phone market in the States, and has real financial muscle. I suspect it will steadily grow profits into the future. The shares have risen steadily since the Credit Crunch, but are down from their highs.

Because of the run these shares have already had, I would say the company is a hold at the moment. The company’s debt puts me off from buying any more. But I regard this as a reliable but low-growth income share, which is worth a place in your high-yield portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Prabhat owns shares in Vodafone and Verizon.

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