After a long hiatus, Verizon Wireless will finally pay a dividend of $10 billion to its parent company Vodafone Group Plc (VOD) on January 31, 2012. Verizon Wireless is a joint venture between Verizon Communications (VZ) and Vodafone.
Verizon Wireless, the largest U.S. wireless carrier, did not pay dividends in the last 7 years due to a high debt level. The company was focusing 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 owns 45% of Verizon Wireless and is entitled to $4.5 billion of dividend. This dividend figure is a billion less than Vodafone’s expectation. Nevertheless, we believe the dividend from Verizon Wireless would boost Vodafone’s free cash flow by 50%, thereby increasing returns to its shareholders.
Vodafone is committed to its shareholders in the form of increased dividends and share buybacks. Of the total Verizon Wireless dividend, Vodafone will distribute $3.3 billion to its shareholders and will use the balance to reduce debt.
In fiscal 2011, Vodafone reduced its net debt by 10.4% year over year to £30 billion ($46.7 billion). The company targets a 7% per annum dividend per share growth policy over a three-year period (2011–2014) and expects total dividend 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 business growth. With regard to this, the company sold its entire 3.2% stake in China Mobile (CHL) last year and 44% stake in the French joint venture, SFR, to Vivendi in late June. In addition, Vodafone is 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.
We are currently maintaining our long-term Neutral rating on both Verizon and Vodafone. The stocks retain the Zacks #3 (Hold) Rank for the short term.
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