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Verizon and Vodafone

|Includes: VOD, Verizon Communications (VZ)

The Federal Communication Commission under Chairman Julius Genachowski and the Obama administration are attempting to bring telecommunications undergovernment oversight. More specifically, it is to put the Internet undergovernment rules and regulations. Given the need for technical cooperationamong networks, device makers, third-party software applications and the powerof consumer choice, one wonders what the motive could be; other than that allpurpose vagary - to protect the consumer - the phrase used when facts and exact argument fails.

Apparently the U.S. Court of Appeals for the D.C. Circuit ruling (May, 2010), which denied the FCC the power to regulate telcom "information service" under legacy telephone rules from the 1930s (think Ma Bell), ignited them to their recent action. Despite confirmation of the Internet as an information service under the 2005 Supreme Court ruling in their Brand X decision. The FCC wants to re-define it under traditional telephone service rules. Look for more court rulings on this power grab.

The FCC Chair (

ignoring Ludwig von Mises, "There is no third way") claimed a "third way" between too little and too much regulation; as if it is the number of rules, not the nature of those regulations, that create problems. The FCC wants to apply six sections; the ones of interest are: Sec.201 - requires Internet providers to inter-connect and charge reasonable rates - what would the FCC consider "reasonable." Sec.202 - prevents price or service discrimination - there goes private, network management. Sec.208 - sets up a FCC complaint process - this would allow for endless abuse by 'consumer groups' and competitors. The general term for this onslaught of regulation is net neutrality.

While this introduces political and regulatory risk for Verizon Communications - VZ, it does not appear to be at an insurmountable level. Despite the self-interested support for regulation by Google Inc., Inc., and Netflix Inc. it is hard to picture any financially damaging result slipping by court scrutiny and political lobbying. The major concern of the telcoms is that the, "FCC will require them to share their networks with rivals at government rates" ["New U.S. Push to Regulate Internet, TWSJ, 5/6/10]. So assuming that the telcom industry and partners eventually kill this regulatory push by the central government, how does Verizon Communications look as a stock purchase?

Data traffic, by 2014, should see an eight-fold increase ["U.S. Mobile Operator Traffic Profiles," ABI Research, 2010]. VZ estimates that their wireless data traffic will expand by 20 times by the end of 2014, after they deploy their LTE network ["Wireless Telecommunications Symposium 2010, Richard Lynch, Executive Vice-President & Chief Technology Officer, 04/22/10]. And this increase in traffic will drive their free-cash-flow even higher. And it will flow over Verizon's almost half a million fiber miles of Internet backbone, connecting six continents and 150 countries. Broadband wireless will connection consumer electronics, healthcare, security, automotive, machine-to-machine, etc.

As you probably know, if you wirelessly connect to the Internet using VZ you use Verizon Wireless - VZ-w.  

Vodafone wants to start receiving its share of the VZ

This company is 55% owned by VZ and 45% owned by Vodafone - VOD. VZ has 87.8 mil.retail customers; VOD has 323 mil. proportionate customers (87.8 + 323 = 410.8 mil. world-wide customers). VZ has a $1.90 dividend for a 6.5% yield. VOD has an [after British tax] yield of 6.3%; and this is without any dividend from VZ-w. Verizon currently pays its dividend from repayments from VZ-w for internal loans. The last $5 bil. of these loans will be repaid this year.-w free-cash-flow. The numbers: for 2009, VZ-w had free-cash-flow, before dividends, of $14.518 bil. Accounting for VZ's 55% ownership that comes to $7.985 bil. The $1.90 dividend times 2.83 bil.shares comes to $5.377 bil. Subtracting the dividend from the free-cash-flow leaves $2.608 bil.; a nice sum to have available for other purposes. Vodafone's 45% share of the $14.518 bil. equals $6.533 bil.; while that is not the sum that will be paid to VOD someday, it does indicate the magnitude of the payoff; $6.533 bil./ 5.3 bil. VOD shares equals $1.23 per share [imagine VOD with: $1.30 + $1.23 = $2.53 /sh. dividend]. Verizon and Vodafone both make compelling stocks for the telcom-infrastructure class.


Disclosure: Long: VZ Long: VOD