Last week the internet was buzzing with rumors of Apple coming out with an iPhone that would work on the Verizon Network. If you decided you wanted to trade this rumor what would you do? Would you buy Apple (AAPL) or would you buy Verizon Communications (VZ)? What if I told you Apple didn’t pay a dividend, while Verizon had a 6% dividend yield. Would that make a difference?
As it turns out, I decided I wanted in on this trade. I’ve been wanting to buy an iPhone for a while but the AT&T (T) network is severely congested in major cities and the sound quality for calls is terrible. So I’ve been holding out for the iPhone until it’s available on the Verizon Network. I did however get myself a 32GB iPod Touch that is simply amazing.
I didn’t buy either of these two companies. Instead I bought Vodaphone (VOD) with a dividend yield of approximately 5.3% based on my $23.10 purchase price. It’s not widely known, but Vodaphone owns 45% of Verizon Wireless. The remaining 55% of Verizon Wireless is owned by Verizon Communications.
Verizon Wireless borrowed billions of dollars from its parent company to build out its infrastructure and for the $30 billion purchase of Alltel. It’s been generating nearly $10 billion a year in free cashflow and has been paying back the loans. These loans will be completely repaid in a few months. So what will it do with all the money it's generating? It’ll start paying dividends to VZ and VOD.
Verizon needs the money for its own dividend payments. In addition to the wireless division, it runs a landline division that isn’t anywhere as profitable as Verizon Wireless. And last week, Vodaphone publicly asked Verizon to either spin off Verizon Wireless or to start paying dividends as soon as it was done with the loan repayments.
By itself, Vodaphone generates $8 billion a year in free cashflow. It’s 5.3% dividend seems pretty safe and has the potential to see a massive increase if Verizon Wireless decides to pay out a major portion of its cash flows. In addition to its stake in Verizon Wireless, Vodaphone owns a tiny stake in China Mobile (CHL) and a 44% stake in some French telecom company whose name I can’t pronounce.
This way you get exposure to a global telecom player with exposure to the growing US wireless market and no exposure to the US landline market. You also get a 5%+ dividend yield with exposure outside the the US and the US Dollar. If we do see inflation, this dividend is likely to keep up with it and is probably a better bet than a Treasury bond (which would lose value if we saw high inflation).
For the time being, the “Can you hear me now?” dude is a little less annoying!
Disclaimer: I entered a 50% position in VOD. If the price drops from my purchase price I’ll double down.