Published Mon, 09 Jul 2012 15:00:59 EDT on The Motley Fool
It feels like I've been holding telecom giant Vodafone (LSE: VOD.L) forever. It's that kind of stock. In fact, I only bought it in May 2010 at 1.43 pounds. And I'm pleased I did. Right now, it trades at 1.81 pounds. That's a rise of 27%, plus plenty of juicy dividends on top.
Hark back to March 2000, though, when its share price peaked at 3.99 pounds at the peak of the tech boom. Despite being the world's largest mobile-communications company with approximately 350 million subscribers in the U.K., Europe, Africa, India, and Australia, it still trades at less than half its value of 12 years ago.
I'll put you on hold
This share price demise is regularly thrown in the face of anybody who claims Vodafone is a great long-term hold. Well, I didn't buy at 3.99 pounds, and it still looks a good long-term hold to me.
Not that I'm banking on much in the way of future share price growth. Vodafone doesn't look like a growth stock, and it hasn't for some time, despite strong numbers from its emerging territories, primarily India.
In fact, it is behaving more like a utility. As people the world over view their mobile phone as a basic part of everyday living, I don't expect that to change.
Having said that, it is up 10% since dipping in mid-May.
Verizon's horizonsVodafone pays out more in dividends than any other FTSE 100 company. Whether you're investing direct, in an FTSE tracker, or in most U.K. equity income funds, you are getting a share of that success.
The stock is currently yielding 5.3%, according to Digital Look, and is on a forecast yield of 7.1%. It isn't massively well-covered at 1.6 times and 1.3 times, respectively, but there seems little to worry about. That's because Vodafone's dividend is being hiked, rather than cut, as it reaps the rewards of its 45% stake in U.S. mobile supplier Verizon Wireless (NYSE: VZ), the largest mobile-phone network in the U.S.
The 2 billion pound gift
Vodafone could receive 3 billion pounds from Verizon Wireless this financial year and a further 4 billion pounds by 2016, according to Liberum Capital broker Lawrence Sugarman, who was quoted in The Guardian on Monday. It is likely to plough 75% of that into its dividend, pushing it up 15%.
Vodafone investors have already enjoyed one dividend bonanza this year. In February, it paid out a special dividend worth 2 billion pounds, or 4 pence per share, and that was thanks to Verizon as well. The U.S. operator dished out 6.1 billion pounds' worth of dividends, with Vodafone's 45% share worth a princely 2.8 billion pounds. It used 800 million pounds to reduce its net debt and handed the rest to the likes of you and me.
I like nice surprises. Can we have some more, please?
The answer is likely to be yes, with Verizon Wireless now generating $1 billion of cash every month as revenue soars.
Send him Vittorio-us
Vodafone isn't a shatter-proof stock. You won't be surprised to hear that revenue from Southern European markets has dropped, resulting in a 4 billion pound writedown in those regions.
It also has its tax problems, fighting a retrospective 2.3 billion pound tax charge in India. Chief executive Vittorio Calao has been forced onto a charm offensive over his lavish 14 million pound salary and the fact that Vodafone didn't pay any corporation tax in the U.K. last year. These are touchy subjects in the current political climate.
But with Calao returning 26 billion pounds to shareholders in his four years in charge and profits standing firm at 9.55 billion pounds, Vodafone is likely to sidestep the banking backlash.
Smart guysVodafone's income is growing strongly in India, South Africa, the Middle East, and the U.S. As smartphone penetration grows, so should data revenue.
Vodafone is also streamlining, selling parts of its business in Australia and New Zealand, and looking to reduce its debts. With strong cash flow and a healthy, rising dividend, its status as the defensive anchor of your portfolio looks secure.
No bank account will pay you income of 5% or 6% over the next couple of years. Vodafone will. And you can buy it on an undemanding price-to-earnings ratio of 10.5.
Technology moves fast. Vodafone may still be disrupted by new applications or more nimble rivals. It could be some years before it ever recaptures the heady heights of 3.99 pounds, if it ever does. March 2000 was certainly the wrong time to buy Vodafone. July 2012 looks a lot more secure.... Read more
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