AT&T and Verizon are U.S.-based firms. Vodafone is a global provider headquartered in London. Both AT&T and Verizon have experienced stock price rallies of 30%-plus over the past 12 months, as U.S. investors gravitated toward high-yielding dividend stocks. This appreciation has caused AT&T's and Verizon's dividend yields to fall from 6% to recent lows of 4.6% and 4.4%.
In contrast, Vodafone rose a more modest 14.6% in the same period, and its dividend yield is 7.2% (we are including its regular dividend along with its expected ongoing special dividend from its Verizon Wireless position). For these and other reasons, we prefer Vodafone.
Vodafone owns a diversified portfolio of European, emerging-market and North America-based ventures. The crown jewel of the company is its 45% interest in Verizon Wireless, a leading North American wireless venture that accounts for 50% of Vodafone's profits.
The company also has a strong presence in the fundamentally strong wireless markets of Germany, England, Turkey, India and South Africa. However, Vodafone also has operations in the operationally challenged markets of Spain, Italy and Greece, which together represent 15% of total operating income. These Southern European operations have been a drag on earnings and on the stock price over the past year.
Nevertheless, on a consolidated basis, Vodafone continues to generate positive net revenue, net income and free cash flow growth. Besides offering a highly attractive dividend yield, it trades at 11.5x current earnings of $2.53, compared with 15x for AT&T and 18x for Verizon. So to us, yield and valuation metrics make Vodafone the clear investment choice of the three.
Of the two other stocks, we would prefer AT&T over Verizon. While both companies are blue-chip operations with above-market dividend yields of 4.5% or more. AT&T is selling for 15x earnings, compared with 18x for Verizon. AT&T is also 50% larger than Verizon and has fewer competitive issues and a lower dividend payout ratio than Verizon. All in all, AT&T has less risk and offers more upside appreciation and dividend growth potential than Verizon.
One critical consideration in analyzing telecom companies relates to the fact that a majority of the value at telecom providers today is derived from owning healthy and growing wireless assets, as opposed to declining copper wire-line facilities. Vodafone is a 100% wireless-based operator, compared with 70% for AT&T and Verizon.
Bottom line, with Vodafone, you are getting state-of-the-industry assets, including a 45% stake in Verizon Wireless and a 7.2% dividend for 11.5x earnings. That seems much more appealing than paying 18x for Verizon, Vodafone's partner in Verizon Wireless.
Here is one additional consideration that we believe supports our conclusion: On Thursday, Sprint Nextel (S) confirmed rumors that Softbank was in discussions about making a substantial investment in it. If this deal is ultimately consummated, it could change the competitive landscape of the U.S. market by meaningfully strengthening Sprint's financial wherewithal. Having a strong third competitor in the mix could ultimately have a negative impact on Verizon and AT&T's cash flow and earnings power.