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Don't Hang Up on Vodafone



January 15, 2011 – Comments (1) | RELATED TICKERS: VOD

I know that I've talked about this stock several times in the past.  This week's Barron's contains a bullish article on Vodafone (VOD).

Most of what I wrote about the company back in April still rings true today (please excuse the phone pun :)).

Yesterday I talked about the catalysts that could eventually cause the price of CVS' stock to soar (link).  Today I am going to discuss another cheap, dividend-paying stock that also has a huge hidden catalyst that will likely unlock hidden value in the years to come.

Vodafone (VOD) is a global telecommunications giant that is based in Europe, but has operations across the globe...including in a number of attractive markets like China, India, and Africa.  The company has all three aspects that I look for in stocks.

It pays a Dividend

Unlike U.S.-based companies that pay regular quarterly dividends, many foreign companies pay dividends twice per year that fluctuate depending upon how their operations are performing (currency changes have an impact as well).  Last year VOD paid shareholders two dividends, totaling $1.237/share.  Based upon the company's current share price, that's equivalent to a 5.3% dividend yield...which is pretty darn attractive particularly in today's zero interest rate world where savers are punished.

It's Cheap

After backing out Vodafone's 45% stake in the U.S.-based Verizon Wireless (more on this in a second), the company only trades at around 8.2 times its free cash flow.  VOD looks even cheaper if one backs out more hidden assets like its 3.2% stake in China Mobile (CHL) (worth around $8 billion USD) and its 44% position in Société Françaisedu Radiotéléphone (also worth around $8 billion USD), and Vodafone is only trading at 7 times free cash flow.  Any way you slice it, VOD is cheap.

Potential Catalysts

Vodafone currently receives nothing from its investment in Verizon Wireless.  That's right, zip.  All of the money that this great business generates goes straight to Verizon (VZ) to pay off the $30 billion loan that it provided the wireless division to purchase Alltel several years ago.  Well, all that is coming to an end my friends.  At the current pace, the Alltel loan will be completely paid off by some time in late 2011.  When that happens, VZ will have no choice but to resume making regular dividend payments to VOD.  

The beauty of this is that Mr. Market is currently giving VOD little to no credit for hits huge ownership position in the United States' premier wireless company.  Once that cash starts flowing to Vodafone (and we're talking about a lot of cash...Verizon Wireless generates an estimated $10 billion in free cash flow annually) the company's earnings will take off.  VOD can use the cash to invest in emerging markets and pay shareholders a larger dividend.  

Eventually, Verizon may even end up buying the 45% of its wireless division that it doesn't own from VOD (see article: Vodafone claims gains in Verizon Wireless talks).

As an added bonus, Verizon Wireless will eventually get a nice shot in the arm when Apple finally decides to allow owner carriers besides AT&T to support the iPhone.  Who knows when this will happen, but it eventually will.

So there you have it.  Another cheap, dividend stock, with a free embedded call option.  Investing gurus like David Einhorn and Vitaliy Katsenelson like this trade and I do as well.

I have been long VOD for a while now and I believe that it has considerably more upside, even after rising by 25% since my initial write-up.

Here's a few key quotes from the Barron's piece:

But at roughly nine times forward earnings, the U.S.-listed shares have never been this cheap. Add that to promising prospects and a hefty -- 5.9% -- dividend yield, and the stock offers a compelling opportunity...

"There are too many positive catalysts for this stock to stay valued where it is over time," says Stephen Morgan, manager of the BB&T Select Equity Fund. "They have a lot of shots on goal..."

Yet the ADRs are a bargain, trading at a 20% discount to the broader telecommunications sector. In fact, Vodafone has one of the lowest price-to-earnings multiples of any large-cap telecom company.
Vodafone offers investors a cheap, somewhat hidden way to take advantage of the fact that Verizon is finally going to be able to sell Apple's uber-popular iPhone.

Don't Hang Up on Vodafone 


1 Comments – Post Your Own

#1) On January 15, 2011 at 8:11 PM, portefeuille (98.91) wrote:

Don't Hang Up on Vodafone

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