Vodafone $10 Billion Dividend Quandary Draws Investor Ire

More than a decade after Vodafone Group Plc (VOD) started a U.S. mobile-phone partnership with Verizon Communications Inc. (VZ), payments from the venture are still uncertain and investors’ patience is wearing thin.

A year ago, Verizon Wireless announced a $10 billion dividend, the first payout since 2005. The venture’s board is set to decide on the size of this year’s payout as early as this week, said two people with knowledge of the matter, asking not to be identified as the discussions are private.

“The uncertainty generated by not having a regular dividend policy from Verizon Wireless is very annoying,” said Peter Braendle, who helps manage about $55 billion at Zurich- based Swisscanto Asset Management, including Vodafone shares. “Dividends were and still are very important to attract new investors, especially for Vodafone, amid such a challenging economic environment.”

The need for Vodafone, which owns 45 percent of Verizon Wireless, to negotiate a payment each year from the largest U.S. mobile operator is fanning discontent among investors at a time when the Newbury, England-based company faces the threat of a $3.6 billion tax bill in India and is poised to report a slowdown in revenue growth this week.

Vodafone Chief Financial Officer Andy Halford said in May that a dividend should come in “hopefully on a reasonably regular basis.” The same month, Chief Executive Officer Vittorio Colao called the U.S. dividend a “luxury problem with Verizon paying all this cash.”

Crucial Dividends

Shareholder payouts are crucial for European operators, the third-worst performer of 19 industry groups in the Europe Stoxx 600 Index this year, to attract investors as they use stable cash flows from phone contracts to pay higher-than-average dividends.

Vodafone’s dividend yield, at 7.4 percent, trails that of Europe’s biggest phone companies, according to data compiled by Bloomberg. Deutsche Telekom AG (DTE)’s yield is 7.6 percent, compared with 12.9 percent for France Telecom SA (FTE) and 10.6 percent for Telefonica SA. The average for Western European operators that pay a dividend is 7.5 percent, compared with 5.8 percent for North America’s biggest phone companies.

When Vodafone received the $4.5 billion dividend from the venture last year, it paid 2 billion pounds ($3.1 billion) of it as a special dividend to shareholders. Previously, Verizon had withheld the dividend from the partnership to focus on paying down debt.

‘Huge Headache’

“The dividend issue is a huge headache for Vodafone,” said Espen Furnes, who manages the Delphi Europa (DFEUROP) fund at Oslo- based Storebrand Asset Management, which oversees $72 billion and until April owned shares in Vodafone. “Vodafone seems to be unable to resolve the dividend situation and they either need to buy the remaining stake or sell it, but both options don’t seem feasible now.”

Vodafone repeatedly opted to keep its stake in the venture. Verizon, based in New York, said in May 2010 it would be interested in purchasing Vodafone’s holding and the partners held talks in March 2010, discussing options, including a merger, buyout or a dividend payout, two people familiar with the deliberations said at the time.

The board of Verizon Wireless, which is made up of executives from both owners, may decide on a smaller dividend after the operator last year agreed to pay $3.6 billion for mobile frequencies from Comcast Corp. (CMCSA), Time Warner Cable Inc. and Bright House Networks LLC, said Swisscanto’s Braendle.

Slowing Growth

“Even as I expect the dividend from Verizon Wireless to be similar to last year’s, it would also be reasonable to see a lower dividend,” he said.

Verizon Wireless had $12.8 billion in cash and cash equivalents at the end of 2011, and paid $10 billion of that as dividend. At the end of 2010, the operator had $5.3 billion in cash and cash equivalents.

Vodafone may say on July 20 that service revenue growth, excluding currency swings and acquisitions, slowed to 0.8 percent in the three months through June, after rising 1.5 percent a year earlier, according to a Bloomberg survey of analysts.

The company, which is no longer the world’s biggest mobile- phone company after China Mobile Ltd. (941) boosted sales last year, is increasingly relying on its U.S. wireless venture to make up for shrinking sales in crisis-stricken European economies, including Spain and Italy.

Dividend Lure

“The main driver for investors to buy telecom stocks, including Vodafone, has been dividends,” said Heinrich Ey, a fund manager at Allianz Global Investors in Frankfurt, which manages about 300 billion euros, including Vodafone shares.

Vodafone rose 1.4 percent to 185.20 pence in London today, valuing the company at 91.2 billion pounds. Verizon Communications gained 0.9 percent to $46.09 as of 12:31 p.m. in New York, giving the company a market value of $130.1 billion.

Verizon Wireless accounted for 42 percent of Vodafone’s operating profit, excluding some items, last year. In India, Vodafone may face a bill of as much as 200 billion rupees ($3.7 billion) as the government considers amending the law to get tax contributions from the 2007 acquisition of Hutchison Whampoa Ltd.’s local operations.

Verizon Communications tomorrow may report second-quarter sales of $28.5 billion, up from $27.5 billion a year earlier, according to analysts surveyed by Bloomberg.

Verizon Communications needs the dividend as well and can’t afford to avoid distributing Verizon Wireless’s cash for long, said Todd Lowenstein, a Los Angeles-based fund manager at Highmark Capital Management Inc., which oversees about $17 billion, including Vodafone shares.

Teasing Investors

Verizon Communications gets the remaining 35 percent of its revenue from Internet connections and the declining home phone market in the U.S. It has also committed to paying its own shareholders about 50 cents a share per quarter, which amounted to about $5.6 billion last year.

“Verizon needs the distributions from the wireless business to fund its own ongoing dividend,” Lowenstein said.

Still, Verizon may be teasing Vodafone’s investors with the dividend as it evaluates a bid for Vodafone’s stake in the wireless venture, said James Britton, the head of telecommunications research at Nomura Holdings Inc. Verizon’s share price, which has risen 15 percent this year while Vodafone gained 3.5 percent, may provide leverage in a deal, he said.

“They may well have an interest in Vodafone’s share price a little lower because in a combination scenario, it would be easier for them to make a merger more appealing,” he said. “It could offer a better premium to a lower share price.”

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Scott Moritz in New York at smoritz6@bloomberg.net; Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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