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Another cheap, dividend stock that has hidden assets and potential catalysts

Recs

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April 21, 2010 – Comments (11) | RELATED TICKERS: VOD , VZ , CHL

 

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.

Deej

Long VOD

11 Comments – Post Your Own

#1) On April 21, 2010 at 2:00 PM, samwise7 (< 20) wrote:

-(Dow Jones)- Vodacom Group Ltd. (VOD.JO), South Africa's largest cellphone network operator by subscribers, Wednesday said its earnings likely fell by as much as 35% in the last financial year after it took an impairment charge against its Gateway unit.
Basic earnings are expected to be between 25% and 35% lower in the year through March than the 4.09 rand ($0.55) a share recorded a year earlier, the company said.

-By Robb M. Stewart, Dow Jones Newswires; +27 11 783 7848; robb.stewart@dowjones.com

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#2) On April 21, 2010 at 5:09 PM, SockMarket (36.00) wrote:

nice blog deej.+1.

Im glad to see youre back.

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#3) On April 21, 2010 at 8:23 PM, TMFDeej (99.23) wrote:

Thanks Daniel.

Deej 

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#4) On April 21, 2010 at 8:41 PM, portefeuille (99.66) wrote:

found your old post.

TMFDeej Top Pick - Vodafone

 

I consider Vodafone to some degree a Düsseldorf company (see this post, the Mannesmann Hochhaus is shown in the first picture of comment #6 of that post) as Mannesmann shareholders got about 50% of the merged company and Mannesmann is a Düsseldorf company ...

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On 29 June 1999, Vodafone completed its purchase of AirTouch Communications, Inc. and changed its name to Vodafone Airtouch plc. Trading of the new company commenced on 30 June 1999.[19] To approve the merger, Vodafone sold its 17.2% stake in E-Plus Mobilfunk.[20] The acquisition gave Vodafone a 35% share of Mannesmann, owner of the largest German mobile network.

On 21 September 1999, Vodafone agreed to merge its U.S. wireless assets with those of Bell Atlantic Corp to form Verizon Wireless.[21] The merger was completed on 4 April 2000.

In November 1999, Vodafone made an unsolicited bid for Mannesmann, which was rejected. Vodafone's interest in Mannesmann had been increased by the latter purchase of Orange, the UK mobile operator.[22] Chris Gent would later say Mannesmann's move into the UK broke a "gentleman's agreement" not to compete in each others home territory.[23] The hostile takeover provoked strong protest in Germany, and a "titanic struggle" which saw Mannesmann resist Vodafone's efforts. However, on 3 February 2000, the Mannesmann board agreed to an increased offer of £112bn, then the largest corporate merger ever.[23] The EU approved the merger in April 2000. The conglomerate was subsequently broken up and all manufacturing related operations sold off.

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(from here)

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#5) On April 21, 2010 at 8:42 PM, portefeuille (99.66) wrote:

I told my father to sell his Mannesmann shares about a week before the merger was announced. He almost sold at the top. One of my better pieces of advice, hehe ...

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#6) On April 21, 2010 at 8:45 PM, portefeuille (99.66) wrote:

Vodafone in London trading.



enlarge

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#7) On April 21, 2010 at 8:47 PM, portefeuille (99.66) wrote:

http://caps.fool.com/tag/duesseldorf.aspx

not guilty of this "tag". someone else must have suggested it. I only suggested the "almost correct" spelling ...

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#8) On April 21, 2010 at 8:54 PM, portefeuille (99.66) wrote:

Consensus 2010 P/E and dividend yield for the components of the Stoxx50 index.

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#9) On April 21, 2010 at 8:58 PM, portefeuille (99.66) wrote:

Allianz, BASF, Bayer, Daimler, Deutsche Bank, SAP and Siemens are among my largest positions. I also like Banco Santander, Roche and ABB.

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#10) On April 21, 2010 at 9:01 PM, portefeuille (99.66) wrote:

Oh, and Telefónica is also one of my largest positions and currently my favourite telecom stock.

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#11) On April 22, 2010 at 6:36 PM, rofgile (99.44) wrote:

VOD is one of my largest positions too, IRL.  Good dividends.

-Rof

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