Vodafone Group Plc (VOD) anticipates dividends from Verizon Wireless, its joint venture with Verizon Communications (VZ). Vodafone owns 45% of Verizon Wireless and Verizon owns the remaining 55%.
With the majority holding, Verizon has a right to approve a resumption of dividend payment that was suspended during the last 7 years due to the high debt levels at Verizon Wireless. Accordingly, the company has sustained its focus on maximizing free cash flow, maintaining a strong balance sheet and reducing debt.
Aided by its balance sheet repair work, Verizon Wireless succeeded in significantly reducing its net debt to $9.6 billion on March 31, 2011 from $22.4 billion on March 31, 2010. In addition, Verizon Wireless generated free cash flow of about $12 billion last year, representing 45% of Vodafone’s share.
Vodafone now expects a return on its investment in the form of a dividend of about $5.5 billion that is expected to be paid in the upcoming calendar year.
Further, Vodafone is expected to receive dividends of €200 million from the sale of a 44% stake in its French joint venture, SFR, expected to be completed in June end.
Vodafone is committed to its shareholders in the form of increased dividends and share buybacks. The company targets a 7% per annum dividend per share growth policy over a three-year period (2011–2014) and expects total dividends per share to be no less than £0.1018 for fiscal 2013.
With respect to share buybacks, Vodafone is exiting minority holdings to expand in emerging markets such as Eastern Europe, Asia, India and Africa to fuel growth. With regard to this, the company sold its entire 3.2% stake in China Mobile (CHL) last year. In addition to the sale of SFR, Vodafone is in the process of selling securities in the Japanese wireless operator Softbank Corporation. These three transactions will help Vodafone to reward shareholders in the form of share buybacks totaling €6.8 billion.
In fiscal 2011, Vodafone also reduced its net debt by 10.4% year over year to £30 billion ($46.7 billion). The company generated free cash flow of £7.1 billion ($11 billion), down 2.7% year over year. We believe the Verizon Wireless dividend would boost Vodafone’s free cash flow by 50% thereby increasing returns to its shareholders.
We are currently maintaining our long-term Neutral rating on the stock. However, the stock retains the Zacks #4 (Sell) Rank for the short term.
