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  • Dividends And Strong Fundamentals 0 comments
    Aug 9, 2011 7:48 AM | about stocks: VZ, VOD, T
    Investors usually realize that companies which have strong fundamentals are often those that that are good dividend payers. It stands to reason, a company whose business is doing well will have the ability to consistently pay a valuable dividend payment, so the dividend is ultimately a reflection of those strong fundamentals that underlie the company's stock.


    The company's financial numbers, its revenues, earnings and cash flow will show this. So long term fundamental investors who look for dividends will often look first to the company's fundamentals in assessing the dividend situation. Strong fundamentals obviously bear heavily on a company's dividend policy.

    Vodafone Reaps A Dividend

    But how often do investors realize that dividends themselves can be an indicator of strong fundamentals? The recent announcement by telecom Verizon Communications (NYSE: VZ) is just such an indicator. The strong fundamentals, incidentally, belong in this case to UK-based global telecom Vodafone Group Plc (NYSE: VOD), as we'll explain.

    Vodafone has owned 45% of Verizon Wireless, while parent company Verizon Communications has owned 55%. Verizon Wireless last paid a dividend to its shareholders in 2005. Verizon Wireless had held on to the cash supposedly so that it could purchase the remaining 45% of shares from Vodafone it didn't own. Confusing? It needn't be. It's simply that Vodafone and Verizon Communications have basically jointly owned Verizon Wireless.

    Fast forward to now: Verizon Wireless will pay $10 billion in dividends to its shareholders. Vodafone's share of this will be roughly $4.5 billion, of which Vodafone will pay out to its shareholders about $3.2 billion in dividends in February, 2012. The rest of the proceeds from Verizon will be used by Vodafone to pay down some debt.

    Separated from the rest: Vodafone's recent one-week stock chart. Note it rose compared to T, VZ and the S & P 500.

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    Vodafone Fundamentals

    Vodafone has a market cap of $145 billion, trades at a current PE of around 11, and a forward multiple estimated at about 9. Vodafone pays an annual dividend of $1.92, for a current yield of 6.8%. If we compare these numbers to Verizon with its market cap of $100 billion, Verizon trades at a PE of more than 15, with a forward multiple of about 13.5. Verizon pays a dividend of $1.95 on an annual basis, for a current yield of 5.5%. Indeed, Verizon is often a cornerstone stock for income investors, along with or instead of the other major US telecom, AT & T (NYSE: T).

    Dividends And More

    While the point of the above is not necessarily to compare the two companies as investments, though that's certainly a valid exercise and one which dividend investors do all the time, it does show that Vodafone is a powerful company with a lot of financial and business strength. Verizon stock fell on the news of the payout, in part because it's going to use the dividend windfall from Verizon Wireless to keep paying its own regular dividends. Vodafone's share of the Verizon Wireless dividend will be added to its regular dividends, so its stock rallied on this welcome news for its shareholders.

    Furthermore, there may be additional Verizon Wireless dividends, so Vodafone shareholders stand to reap more of what may become a bonanza. It's estimated that Vodafone's regular dividends along with the additional Verizon Wireless dividends will give it, at least for the February, 2012 dividend payout, what would amount to an annualized 10% yield. Again, no one is sure of what the future disbursements from Verizon Wireless, if any, will be, but even as a one time boost for Vodafone shareholders, there's no downside.

    Special Dividends As Bonus

    What should be noted by investors here is that Vodafone is a thriving global telecom, which has shown astute management with its Verizon Wireless investment. Vodafone's a company that has rewarded its shareholders. The thriving telecoms throughout the globe do not remain hitched solely to the wireline technology of the business, which is rapidly becoming surpassed if not outmoded by mobile telecom. More than that, though, even if you were to strip away the Verizon Wireless investment from Vodafone, its business in the UK and throughout Europe is producing good results. It recently sold its holding in a French mobile telecom company for roughly $11.5 billion and plowed back more than half of this into share buybacks.

    Vodafone isn't a perfect business of course. Far from it. Like all telecoms, it's in a fiercely competitive industry which remains capital intensive, as Vodafone's $47 billion in long term debt as of the end its last fiscal year, March 2011, attests. Though Vodafone has grown revenue in recent years, it has struggled some in keeping up its net income. It produces strong cash flow, consistently reaching $12 billion free cash flow annually, though. More than that, with its Verizon Wireless investment, it has staked out a claim as a true, meaningful global telecom company which is positioning itself for the long haul. Investors take note. Dividend investors take special note.

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    Global Profits Alert (GPA) is published by Trippon Financial Research, Inc. a financial media organization with offices in the United States, Hong Kong and Mainland China. GPA is written by Jim Trippon in conjunction with George Wolff, Sunny Wang, Todd Shriber, Kelley Damiani and J. Daryl Thompson.

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    Stocks: VZ, VOD, T
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