Is the Verizon iPhone, a VOD catalysts, finally about to arrive?
A couple of months ago I gave the thumbs up to Vodafone (VOD) here in CAPS. The company has all of the attributes that I look for in an investment:
It has several catalysts that could possibly eventually unlock value and cause its stock to soar
It pays a solid dividend for me to wait for those catalysts to arrive.
Since that time, VOD has's performance hasn't exactly been stellar. Its stock is down a little over 7%. Sure it's outperforming the S&P 500 by 6%, but I'm not looking for moral victories or to lose less than everyone else when I invest...I'm looking to make money. Fortunately, I'm patient when I invest in companies.
One of the catalysts that I cited when I wrote about and invested in Vodafone may finally be arriving. Rumors about when VOD's joint-venture with Verizon (VZ), Verizon Wireless, will be able to begin selling Apple's iPhone are a dime a dozen, but yesterday a very credible source, Bloomberg, contained an article stating that Verizon Wireless may be able to begin selling the iPhone as early as January 2011 (link: Verizon May Sell 12 Million IPhones After AT&T Exclusive Ends).
If this rumor proves to be true, what sort of impact would it have upon VOD? Let's take a quick, back of the envelope-like look at how the addition of the iPhone would move the needle for Verizon Wireless. According to its website, Verizon Wireless currently has 92.8 million customers. Analysts quoted in the Bloomberg article believe that Verizon Wireless could sell 12 million iPhones in 2011. That's a 12.9% increase in subscribers for the company...not just cheapo subscribers with bare bones plans, but premium data subscribers. That's an impressive increase in the top line when many companies are struggling to grow revenue (though some of this gain will likely be eaten up during the first year by subsidies to entice new subscribers).
Granted, not all of that money will flow directly to Vodafone. In fact, none of it will (other than a theoretical increase in value of its JV) because Verizon Wireless is currently using all of its extra money to pay down the $30 billion loan that it took out from VZ to purchase Alltel several years ago. Without the addition of the iPhone, the Alltel loan was on pace to be completely paid off by some time in late 2011. Additional earnings from the addition of the iPhone might even accelerate the paying down of this debt.
Because Vodafone is not currently getting any money from Verizon Wireless, Mr. Market is currently giving it 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.
Bears argue that it will be a cold day in he-two-sticks when Verizon agrees to pay any money to VOD, that it is trying to force VOD to become frustrated sell its portion of the venture. What they're missing though is that Verizon's wireline revenue is falling so rapidly that it might need a dividend from Verizon Wireless in order to avoid having to cut the massive 6.5% dividend that it pays its shareholders.
So far, neither Verizon nor Vodafone's stock has moved at all in response to this latest iPhone rumor. It it turns out to be true, I expect that to change. If it doesn't we can afford to be patient and wait for the money to come flowing in because we're getting paid a handsome dividend to do so. Eventually VOD's earnings and cash flow are likely to increase dramatically as a result of its stake in Verizon Wireless. When that happens, Mr. Market will have no choice by to notice.