Shares in Vodafone (LSE: VOD) (NASDAQ:VOD.US) are trading around their highest for five years, supported by a 5.3% yield and the prospect of a big cash return from sale of its interest in Verizon Wireless (VZW).
But Vodafone is suffering declining revenues, its dividend isn’t covered by the free cash flow generated by Vodafone-controlled businesses, and the company is embarking on an acquisition spree after suffering years of multi-billion pound write-offs from previous acquisitions.
So there’s much to be said for bailing out and taking profits, and it’s no surprise that ace dividend investor Neil Woodford has pulled out.
On balance, I’m staying in. But it’s a cautious stance, and I don’t think the dividend alone is sufficient to make the investment case any longer. My reasoning is based on three factors:
First, there is more upside if a deal is struck to sell VZW. Sober estimates put the value of the stake alone at 130p to 170p per share. True, Vodafone’s shares will take a hit if the VZW sale evaporates. But the value of the VZW stake won’t disappear overnight, so patience would be rewarded in those circumstances.
Secondly, I think the VZW stake will be sold. Verizon Communications is clearly keen to buy. Vodafone’s stance is changing. When a possible sale was first mooted, Vodafone’s management would have had little option but to return all the cash to shareholders and preside over a shrunken company — generally, executives don’t like those sort of deals. Now it has broken cover on a plan that could use some of the proceeds for growth.
A connected world
That’s the third factor. Vodafone is making much more of its ‘unified communications strategy’ — basically, linking fibre with mobile to offer customers bundled services. Last quarter it sealed deals for fibre access in Spain, Italy and Germany in addition to its game-changing £7bn offer for Kabel Deutschland. In the enterprise segment, it has re-branded the old Cable and Wireless to offer converged services to business.
That makes sense in a smartphone world driven by data and content. It’s defensive, with broadband being a stickier product, and it adds a new dimension for growth. This is the beginning of a sea-change in the market and Vodafone could be a winner or loser, but I’m sticking it out for the time being.
And that 5.3% yield is generous compensation, though Vodafone has become a riskier share. In contrast, the Motley Fool’s pick for the top income stock of 2013 has a dividend that’s as safe as they come. It’s also yielding well over 5%, and the company has a policy of increasing dividends at least in line with inflation. That’s a great dividend to lock in – I have. You can find out more by downloading this report. Just click here — it’s free.
> Tony owns shares in Vodafone but no other shares named in this article. The Motley Fool has recommended shares in Vodafone.