This Overseas Telecom Play is Dialed In

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This Overseas Telecom Play is Dialed In

By Tim Maverick, Senior Correspondent

In the search for income, it can often be useful to see what “the big boys” are buying.

Take David Einhorn, for instance. He’s one of the most successful hedge fund managers out there – his Greenlight Capital LP fund has averaged returns of nearly 20% annually since 1996.

It’s interesting, then, to see that global telecommunications giant Vodaphone Group PLC (VOD) has been one of his favorite high-yield dividend stocks for years.

The company has mobile networks in 26 countries and partners with mobile firms in another 50. It services 400 million mobile customers worldwide. Currently, its stock yields 6.3%.

U.S. investors may remember that, in 2013, Vodaphone sold its 45% stake in Verizon Wireless to Verizon Communications Inc. (VZ) for $130 billion. Since then, Vodaphone hasn’t just been sitting on its cash pile. In addition to buying out minority partners in fast-growing markets such as India, the company is wisely upgrading its global network, including spending $28 billion to upgrade to 4G.

This is a logical move considering that in Europe, one of its core territories, only about 6% of its customers are using 4G. Vodaphone expects to have 4G coverage throughout most of Europe within a year or so, and that will be a significant differentiator.

In fact, Vodaphone CEO Vittorio Colao told the Financial Times that more of Europe was returning to growth “as customer demand for 4G and data takes off.”

High-Yield and Secure

Vodaphone has treated dividend investors very well over the years, increasing its dividend an annualized 8.8% since 2010. Plus, the United Kingdom (where Vodaphone is based) doesn’t withhold taxes on dividends for U.S. investors.

Going forward, the dividend looks solid for a number of reasons. First, there’s still about $17 billion in cash left over from the Verizon deal. Second, the company’s cash flow is steady, and the stock is trading at a relatively cheap seven times expected 2015 cash flow. Finally, with 80% of its revenues coming from mobile users, a return to growth in its core business is a great sign.

Income investors may end up getting a nice capital gains kick from this stock, as well. You see, Vodaphone is continuing to hold talks with John Malone’s Liberty Global PLC (LBTYA) about swapping assets in Europe – or even a possible merger.

Now, it’s unlikely that Liberty Global would overtake Vodaphone because of the two companies’ sharply contrasting corporate cultures. Vodaphone is a low-debt, high dividend company, while Liberty Global follows Malone’s strategy of fast, debt-financed growth and zero dividends.

But assets swaps make perfect sense as Liberty’s cable assets mesh nicely with Vodaphone’s wireless assets in Europe. Perhaps a symbiotic joint venture is possible . . .   Or, Vodaphone could even buy out Liberty, if Malone is willing to sell.

If some sort of deal is reached, don’t be surprised if the company is split into two, with Vodaphone’s large emerging market networks spun off into a new and faster-growing company.

In the meantime, enjoy the stable income that this hedge fund favorite can provide.

Good investing,

Tim Maverick

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By Tim Maverick