Juicy Dividend Telecom Stock After Preferred Shares Conversion

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

VimpelCom (NASDAQ: VIP) has recently announced that it received the notice from Altimo Cooperatief U.A (Altimo) to convert more than 128.5 million Convertible Preferred Shares into Common Share at the ratio of one for one. The conversion date would be in April 2013 and the conversion premium would be $10.835. Thus, VimpelCom would receive nearly $1.4 billion in cash from Altimo in the conversion transaction. Is the conversion beneficial for VimpelCom and its existing shareholders? Should we become bullish about this stock because of this news?

Business Snapshot 

VimpelCom, a Bermuda-registered Company, is considered to be one of the big global telecommunication operators for both mobile and fixed technologies, operating in many countries including Russia, Italy, Kazakhstan, Georgia, Armenia, etc. In 2011, the majority of its revenue came from Russia and Europe & North America, accounting for 44.3% and 27.6% of the total revenue respectively. In Russia, the firm recorded to have 57.2 million subscribers, whereas Italy had around 21 million subscribers. The largest number of subscribers were from the Africa and Asia regions, 82.1 million. However, Africa & Asia had a lowest Average Revenue Per User (ARPU), of $3.8 in 2011, whereas the Europe & North America segment generated the highest ARPU, $21.7.

Stronger and More Value After Conversion

After the conversion, Altimo, which is one of the biggest shareholders in VimpelCom, would increase its economic interest in the company from 52.7% to 56.2%, whereas Altimo’s voting percentage remained unchanged, of 47.9%. VimpelCom would receive nearly $1.4 billion as a result of a conversion. The conversion price of $10.835 was more than the current trading price of $10.55 per share, which indicated the signal of value from the insider shareholder. Thus, the conversion would strengthen its financial strength significantly, because of increasing cash level, financial obligations burden. In addition, VimpelCom could increase its net income for shareholders as well as increase the common share dividend payment. 2013 will be the year of free cash flow improvement for the company on reasonable capital expenditures. Thus, it would be an important source for both debt reduction and increasing dividend payment for existing shareholders. 

As of September, VimpelCom recorded to have nearly $15.5 billion in its stockholders’ equity, nearly $3.25 billion in cash and more than $28.6 billion in both long-term and short-term financial liabilities. It had a huge amount of goodwill and intangible assets, of nearly $27.4 billion. Thus, it had negative book value of -$7.8 per share. Like other telecom operator, VimpelCom has consistently generated growing operating cash flow. However, because of its high level of required capital expenditure, the free cash flow has been fluctuating.

Highest Dividend Yields

Compared to its peers including Mobile TeleSystems OJSC (NYSE: MBT) and Rostelekom OAO (NASDAQOTH: ROSYY), VimpelCom is paying the highest dividend yield, 10%, whereas Mobile TeleSystems and Rostelekom are paying 4.2% and 0.6% yield respectively. For the trailing twelve months, Mobile TeleSystems delivered the highest return on capital as well as net margin, 8.15% and 7% respectively. VimpelCom had a 6.42% return on capital and the lowest net margin among the three, of 4.19%. In terms of valuation, those three had somehow similar EV multiples. VimpelCom is valued the cheapest among the three, of 4.37x EV/EBITDA, whereas Mobile TeleSystems and Rostelekom had a bit higher valuation, of 5.1x and 4.65x EV/EBITDA.

My Foolish Take

With the strong cash flow generating operation, gradual deleveraging process over time, juicy dividend yield and reasonable multiples, VimpelCom could be in the list of diversified income portfolios of long-term investors. A recent conversion at the higher than current market price indicates a value signal, along with the potential of stronger financial strength and dividend increases for shareholders. 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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