There’s also Vodafone’s potential as a dividend stock to consider. We’ve estimated its market capitalization at about $70 billion post close. While the company will cut its dividend once it no longer has access to Verizon Wireless’s cash flow, management has suggested that annual payments would remain over $1 per share. The stock’s current price is $32, with over $16 in cash and stock inbound as a result of the deal; therefore, a 6% annual yield even at the reduced dividend seems quite reasonable. In addition, as a telecom stock Vodafone would be less exposed to market conditions than the average company (its current beta is 0.7).
So why is the market not more excited about the Vodafone deal? The reason likely lies in the distrust of company management, and particularly in concerns that they are getting so much cash to play with. Vodafone is known as a not very well run company- note that, as we’ve said, the vast majority of its market cap is accounted for by a minority stake in Verizon Communications Inc. (NYSE:VZ) rather than the assets it manages itself. Investors may worry that Vodafone will invest this cash poorly rather than returning it to shareholders- after all, if that was what management intended then they would simply have made the cash to shareholders a larger portion of the Verizon Communications Inc. (NYSE:VZ) deal- and therefore destroy shareholder value. $30 billion is just under the $35 billion enterprise value of T MOBILE US INC (NYSE:TMUS), for example, and Vodafone could easily make that company an acquisition target with some additional debt. On the other hand, given how cheap the smaller Vodafone will be in terms of cash flow it’s possible that it would be acquired outright by another telecom.
As a result we are a bit wary of endorsing Vodafone Group Plc (ADR) (NASDAQ:VOD) as a clear value stock at this time- we’d likely want to know more about how management will deploy its cash in order to buy it on the basis of a cheap cash flow multiple. Still, it is certainly a prospect as more information on that point unfolds. Income investors, however, should continue to be interested even with the company cutting its dividend, as our take is that Vodafone will come out of the sale paying a fairly high yield even for a telecom stock.
Disclosure: I own no shares of any stocks mentioned in this article.