If you’ve held Vodafone (LSE: VOD) (NASDAQ: VOD.US) for a long time, you probably think of it as a reliable income stock. The company has increased its dividend for the past two decades, and in recent years has yielded around the 5% mark.
However, Vodafone increasingly relied on dividends from its US associate Verizon Wireless (VZW). The impending sale of that interest fundamentally changes the investment case.
Dividend
When the VZW deal completes, shareholders will receive around 112 pence per share (in cash or cash and shares of US mobile operator Verizon Communications). So if you buy, or own, Vodafone shares now at 240p, 112p of that represents capital that you will get back in short order.
What do you get for the other 128p? Vodafone will be a much smaller company: its forecasting operating profit of £5bn for the fiscal year ending March 2015, against around £12bn for the current year. After a share consolidation of around one-for-two its yield is expected to be similar to today’s, but you’ll only have half as many new shares so the absolute amount of your dividend will halve.
Europe
What will the new Vodafone look like? In Europe, the story is all about convergence, bundling together not just mobile voice and data, but also fixed-line telephone, internet broadband and television. Vodafone bought German cable TV operator Kabel Deutschland and has said it will ‘build, borrow or buy’ the fixed line infrastructure it needs.
Vodafone has a good position in Europe, with mobile-phone market leadership in Germany and Italy, and 25% market share in the UK. Economic recovery in the eurozone would help restore revenues.
Emerging markets
Vodafone’s emerging market position has longer-term growth potential. It has 150m customers in India; nearly double the UK, Germany and Italy combined. It has 60m customers in Africa. In these markets, technology may leap over fixed-line infrastructure, with mobile data becoming the basic form of communication.
Those are good prospects, but Vodafone’s management may not get the opportunity to explore them. There is still strong market speculation that a bidder — most likely AT&T — will pounce on Vodafone after the VZW transaction completes. My back-of-an-envelope calculation is that roughly 50p of the current share price is bid speculation, with Vodafone (including the 112p) worth 190p-ish if no bid emerges and 280p-plus if it does. That prompted me to do some profit-taking last month, but to keep the majority of my holding.
