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business newsWhy Vodafone Is a Buy
After seven years, Vodafone is set to begin receiving dividend payments from Verizon Wireless again. Here, bullish and bearish moves for traders based on the news.
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Vodafone (VOD) said yesterday at its annual shareholder meeting that the company will begin receiving dividend payments once again from Verizon (VZ) starting next year.
Vodafone Chairman Sir John Bond said that it has been seven years since it last received a payout from Verizon. Verizon has said that it would eventually make payments to Vodafone for the ownership stake, but it was going to spend money to built out its network first. Bond stated, “The prospect for dividends is now very good, with Verizon's management confirming a pay-out in 2012.” He later told the Financial Times, “The policy not to sell five years ago has been vindicated.”
This is massive news for Vodafone shareholders as the stock price is not reflective of having received a dividend from Verizon for its 45% ownership stake in Verizon Wireless.
Andy Halford, Vodafone's finance director, said the stake in Verizon Wireless is now worth approximately $65-$70 billion, up from $20 billion in 2001.
Now the major issue is how to unlock the value from the Verizon Wireless stake, as Vodafone's market cap is just $137 billion. The stake in Verizon Wireless is more than 50% of its market cap. Trading at less than 9 times forward earnings, and sporting a 7.2% dividend yield, shares of Vodafone are extremely cheap at these levels, and are not reflective of a dividend payment from Verizon.
Major players on Wall Street, including David Einhorn of Greenlight Capital, Dodge & Cox, FMR, and others, are in this name for that specific reason. As analysts begin to realize that a dividend payment is not only likely but imminent, the share price target is likely to be ratcheted up from the sell-side.
ACTION ITEMS:
Bullish:
Traders who believe that Verizon will pay the dividend next year might want to consider the following trades:
- Go long Vodafone on any dips. At $137 billion in market cap, the stake in Verizon Wireless is clearly not reflected in the share price on a sum-of-the-parts basis.
Traders who believe that a dividend payment will come later than expected may consider alternate positions:
- If Verizon decides to hold on for another year on the dividend payment resumption process, Vodafone is likely going to take a hit.
- Verizon would be a beneficiary, as it will hold onto the cash payment for another year.
Below, find some more great ETF and market content from Benzinga:
How to Trade the Apocalypse
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Airline Stocks: Time to Jump In or Step Aside?
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Follow Benzinga on Twitter @Benzinga.
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