Verizon Wireless will not pay a recurring annual dividend to its parent companies Vodafone Group Plc (VOD) and Verizon Communications (VZ). The company needs surplus funds for making acquisitions from time-to-time and buying new radio spectrums.
Verizon Wireless, the largest U.S. wireless carrier, had approved an annual dividend of $10 billion to its parent companies in July. The reinstatement was accounted after 7 years, following continued 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 owns 45% of Verizon Wireless and is entitled to $4.5 billion of dividends in January 2012. The company will pay a part of the Wireless dividend to its shareholders in the form of a special dividend of £0.04 per share amounting to £2 billion ($3.3 billion) in February 2012. The remaining $1.2 billion will be used to reduce debt.
Vodafone is looking for expansion opportunities in emerging markets such as Eastern Europe, India and Africa through new growth strategies. The company is exiting all its minority holdings to boost liquidity, free cash flow and shareholders’ return. Vodafone has no plans to sell its 45% stake in Verizon Wireless as the 2012 dividend will boost shareholders returns and liquidity into the business. But the suspension of the regular annual dividend beyond 2012 could cause a major setback for Vodafone.
If Verizon Wireless does not pay regular annual dividends, Vodafone could be in deep trouble. Suspension of the dividend will also throw cold water on the raised hopes of Vodafone investors who have already waited long for regular annual returns.
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.
