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Verizon Or Vodafone: Which Is The Better Stock?
According to Macquarie Equities Research, yield has become a very important part of total return. I see it every day, just talking to friends at or near retirement age. I call them "yield chasers" and they are fanatical. Canadian telecoms have done well the past three years in terms of capital appreciation because they've increased dividend payouts and share repurchases, leading to increased investment by mutual funds. Macquarie believes European stocks offer the best stock valuations at the moment, followed by Asia and then North America. Two companies with excellent dividend yields are Verizon (NYSE:VZ) and Vodafone (Nasdaq:VOD). Which stock is a better buy? Read on and I'll tell you.
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Free Cash Flow Yield
Macquarie considers free cash flow yield the best way to tell if a stock has dividend potential. Vodafone's free cash flow for the fiscal year ending March 31 is roughly $9 billion. With a current market cap of about $139 billion, its free cash flow yield is around 6.5%. Verizon's free cash flow as of the end of December 2011 was $13.5 billion and its market cap just over $124 billion, meaning its free cash flow yield is around 11%, 430 basis points higher than Vodafone. Higher is better in this instance, so at least by this yardstick, Verizon is the better stock.
Sustainability
One of the benefits of strong free cash flow is it reassures investors that they'll continue to receive dividends well into the future. Current examples of yields on steroids are France Telecom (NYSE:FTE) and Portugal Telecom (NYSE:PT) at around 14.1 and 16.9%, respectively. These are much higher than Verizon at 4.6% and Vodafone at 7.2%. France Telecom has paid the same dividend for the past four years and this consistency has acted as a bit of a floor on the stock price. However, more than 50% of its revenue comes from France and Spain, two countries performing very poorly economically. At some point, it's going to need to conserve its cash. As for Portugal Telecom, it's had to focus on markets outside Europe to expand revenues and earnings. It too could experience reductions in its dividend in the future due to lower free cash. It all comes down to generating cash. In the past five years, Verizon's free cash flow has been roughly 384% of net income, compared to Vodafone at 88%. In terms of sustainability, Verizon is the better bet.
SEE: Free Cash Flow: Free, But Not Always Easy
Valuation
My favorite metric for comparing companies is enterprise value as a multiple of EBITDA. It's a common refrain when reading about M&A activity. That's because it's what a company would have to pay (not counting premium/discount) to buy a business outright. In the case of Vodafone, investors are valuing its enterprise value at 7.8 times EBITDA compared to 4.6 times for Verizon. However, Verizon's net debt is 1.3 times EBITDA to 1.8 times for Vodafone. Therefore, even though Verizon is more profitable and generates greater cash, its enterprise value to EBITDA is 41% less. Verizon wins again.
The Bottom Line
Verizon's Share Everything Plans have created a buzz in the wireless world and while there are supporters and critics, it's the wave of the future. I've been a fan of the company since 2009, when I first recommended its stock. Vodafone is also a good company and its 7.2% dividend yield is higher than Verizon, making the decision a difficult one. However, Verizon's stock has performed better in recent years, which is why I'll have to go with Verizon.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
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Free Cash Flow Yield
Macquarie considers free cash flow yield the best way to tell if a stock has dividend potential. Vodafone's free cash flow for the fiscal year ending March 31 is roughly $9 billion. With a current market cap of about $139 billion, its free cash flow yield is around 6.5%. Verizon's free cash flow as of the end of December 2011 was $13.5 billion and its market cap just over $124 billion, meaning its free cash flow yield is around 11%, 430 basis points higher than Vodafone. Higher is better in this instance, so at least by this yardstick, Verizon is the better stock.
Sustainability
One of the benefits of strong free cash flow is it reassures investors that they'll continue to receive dividends well into the future. Current examples of yields on steroids are France Telecom (NYSE:FTE) and Portugal Telecom (NYSE:PT) at around 14.1 and 16.9%, respectively. These are much higher than Verizon at 4.6% and Vodafone at 7.2%. France Telecom has paid the same dividend for the past four years and this consistency has acted as a bit of a floor on the stock price. However, more than 50% of its revenue comes from France and Spain, two countries performing very poorly economically. At some point, it's going to need to conserve its cash. As for Portugal Telecom, it's had to focus on markets outside Europe to expand revenues and earnings. It too could experience reductions in its dividend in the future due to lower free cash. It all comes down to generating cash. In the past five years, Verizon's free cash flow has been roughly 384% of net income, compared to Vodafone at 88%. In terms of sustainability, Verizon is the better bet.
Valuation
My favorite metric for comparing companies is enterprise value as a multiple of EBITDA. It's a common refrain when reading about M&A activity. That's because it's what a company would have to pay (not counting premium/discount) to buy a business outright. In the case of Vodafone, investors are valuing its enterprise value at 7.8 times EBITDA compared to 4.6 times for Verizon. However, Verizon's net debt is 1.3 times EBITDA to 1.8 times for Vodafone. Therefore, even though Verizon is more profitable and generates greater cash, its enterprise value to EBITDA is 41% less. Verizon wins again.
The Bottom Line
Verizon's Share Everything Plans have created a buzz in the wireless world and while there are supporters and critics, it's the wave of the future. I've been a fan of the company since 2009, when I first recommended its stock. Vodafone is also a good company and its 7.2% dividend yield is higher than Verizon, making the decision a difficult one. However, Verizon's stock has performed better in recent years, which is why I'll have to go with Verizon.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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