Looking for Yield and Stability in Telecommunications
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Given the current market climate, and its violent unpredictability, dividend investing is becoming increasingly attractive as a way to put money to work. More and more investors are using cheap capital available through central bank interventions to seek yield in blue chip stocks, as there are few precious other places for the cautious investor to turn to at the moment. As the European debt crisis has knocked down European shares severely in the last few years, this is the place to go bargain hunting. Telecoms are traditionally a safe bet on the market, and Vodafone (NASDAQ: VOD) offers high dividends and low volatility for investors eager to find relatively safe yield in Europe.
Vodafone is one of the world’s largest mobile carriers with operations across the United States, Europe, Asia and Africa, servicing approximately 370 million people worldwide. The firm also holds a 45% stake in Verizon Wireless (NYSE: VZ), and is continuing to expand its operations in developing markets which account for about 30% of revenue. Despite a number of headwinds, mainly slowing sales in Southern Europe, the firm is well-positioned and available at an attractive valuation.
According to CNBC, Vodafone trades at 13x earnings compared to an industry average of 20x. Sprint Nextel (NYSE: S), an American competitor, is trading at negative 3x earnings and is chronically hemorrhaging money. VOD’s operating margin is a stable 14.3% but the Return on Equity is a little low at only 8.5%. The price to book is 1.16 compared to the industry average of 2.27, all of which points to Vodafone being priced at a discount right now. However, the reason you’re reading this article is probably the stock’s juicy 7% yield, which I have to caution you comes with a very high 94% payout ratio according to Yahoo finance. Still, I believe that Vodafone's strong financial position, combined with its large stake in Verizon, will allow it to continue paying out this level of dividend.
This high yielder also has room to grow. Despite mixed H1 2012 results, the firm confirmed its guidance for the remainder of the year. As expected, revenue declined in all regions except Germany and the United States. This moved the price of the stock down a bit, but the outlook remains strong as the company aims to stabilize the EBITDA margin by 2014. The planned IPO of Vodafone’s India division bodes well for the company, although it remains to be seen how the Indian courts will judge a potentially costly tax case Vodafone is currently involved in.
Verizon Wireless, in which as mentioned earlier Vodafone has a sizeable stake, also continues to perform well, and although there seems to be some confusion over dividend payments, Vodafone should maintain its special dividend originating from its American operations. The need for Vodafone to renegotiate its dividend payments from Verizon every year however, makes for a rather uncertain dividend stream, and Verizon has yet to approve the current dividend payout. Still, Verizon will contribute about 62% of Vodafone's earnings this year. Verizon earnings were strong in the first half of the year, with a beat and a meet in Q1 and Q2 respectively, and look solid for the rest of 2012. Verizon is also a decidedly low-beta stock, with a beta of .51 compared to Vodafone’s .74. VZ is up over 20% in the last twelve months.
As mentioned earlier, European sales are still troublesome for Vodafone especially in the South. Another issue for the company is the possible introduction of stricter telecom legislation in its operating regions. The question also remains whether the firm will be able to sustain its high payout ratio, although their cash position is fairly strong. Finally, increased competition in India and the pending tax case may cause trouble in the future.
The bottom line is that Vodafone has an attractive valuation, low beta and high dividend. The firm makes good money and is well spread geographically. It is well positioned for profitability in the remainder of the year and can benefit from ECB action in the near future. As a blue chip in a defensive sector, I would suggest yield-hungry investors consider Vodafone as a possible addition to a dividend portfolio.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Vodafone Group Plc (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.