Why You Shouldn't Sell Vodafone Now
This has been a great year for Vodafone shareholders. The company's American Depository Receipts, or ADRs, have leaped from $25 per share to over $35 on anticipation of a deal to sell its 45% stake in Verizon Wireless. But investors should fight the temptation to sell.
While the deal was announced in early September, there had been rumblings of serious talks for the last few months. Long-term Vodafone shareholders probably weren't too happy to hear about this. The Verizon Wireless stake was the jewel in an otherwise rusted crown. In fact, without the contribution from Verizon, Vodafone's Europe-centered revenue had been shrinking for the last few reports.
But when news of the deal came out, the markets really liked it. The 45% stake in Verizon was to go for a whopping $130 billion, the high end of what was outlined to the public.
Some feared Vodafone would rush to spend that money on a huge acquisition that would not really add value. But soon after the acquisition, Vodafone CEO Vittorio Colao announced that management would return over $84 billion of the proceeds to shareholders in both cash and Verizon stock: About 48% of Vodafone's market cap. That's a huge payday.
Repositioning the company
Instead of spending big money on a bombastic acquisition, Vodafone will put $20 billion toward reducing debt, and the remainder will go toward building better networks across Europe and also to smaller acquisitions of various European cable operators.
Why is Vodafone targeting European cable operators now? In short, because it must broaden its capabilities to remain relevant. In a world with multiple screens (TVs, smartphones, tablets, etc.), consumers favor a convergence of services just for simplicity's sake. This presents a challenge to Vodafone's business model as a plain, prepaid voice and SMS company.
Responding to this new reality, Vodafone is doing a couple things. First is "Red," a contract plan for unlimited voice and data targeted to smartphone users. Second, it is expanding Europe's broadband network and rolling out 3G and 4G in smaller countries. Third is strategic acquisitions: Vodafone acquired Kabel Deutschland for more than $10 billion and Britain's Cable & Wireless Worldwide for $1.7 billion. There are rumblings of deals in the works in both Spain and Switzerland. The endgame should be a new Vodafone: world-class 3G and 4G networks, cable TV, and high-speed Internet all "bundled" into one. If Vodafone can do this -- and with its new war chest, I'm confident it can -- the company should finally be able to grow sustainably its average revenue per user number.
It's still not expensive
So, Vodafone is being thrifty and lean with its newfound fortune. That money will not be "blown." As a stock, there's still a lot to like about Vodafone despite its big run up this year. At only 12.3 times forward earnings, Vodafone is very reasonable. While its dividend has been pushed down to 4.4% (lower than AT&T's 5.3%), management will be raising the dividend by another 8% next year. Even after this great run, Vodafone is worth holding onto.
Vodafone shareholders should just sit back and enjoy the ride for now. Soon, shareholders will be receiving a big special dividend along with Verizon shares. The 8% dividend yield will come at the end of this fiscal year.
There may come a time to sell Vodafone, but that time is not now. Shareholders should hang on until ADR shares hit at least 14-15 times earnings. This would mean a price of around $42. Right now shares sit at $36. There's still a long way to go.
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The article Why You Shouldn't Sell Vodafone Now originally appeared on Fool.com.Casey Hoerth is long Vodafone in several family accounts which he manages. The Motley Fool recommends Vodafone Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.