The problem with traditional phone companies is that the landline telephone business is in a state of decline and as a result it is an ongoing drag on earnings while the wireless business provides the subscriber growth. 

So, in looking for future growth opportunities in the telecommunications sector, it is necessary to look for a pure wireless play. In addition, a telecom stock would need geographic diversity with an exposure to developing markets since that would be another venue for additional future subscriber growth.

It is also important since we intend to hold the equity in a retirement account that the stock have a great dividend yield and it would be nice if the equity had not participated in last years bull market. Finally, our selection should have an additional catalyst for future price appreciation.

Vodafone Group P.L.C (VOD) is a value stock that has all these attributes and more. The company is already a wireless communications giant and provides services worldwide. It had 303 million consolidated subscribers and 323 million proportionate subscribers on September 30, 2009. 

Vodafone has major operations in Europe, Asia, the Middle East and Africa.  Non-consolidated operations include a 45% stake in Verizon Wireless and stakes in China Mobile, Bharti Airtel and SFR. Vodafone's cash flows are diversified geographically with more than sixty percent of consolidated subscribers residing in emerging markets. 

This diversity and exposure to the growth of emerging markets already generates in excess of an 8% equity free cash flow yield that supports a generous 6% dividend yield for shareholders. An investor in Vodafone gets a nice dividend and has exposure to the future growth opportunities of emerging markets. So, a current investor really gets the yield equivalent of owning a government bond with the added benefit of holding an equity call option to participate in future price appreciation.

If all this was not attractive enough, the stock has a hidden catalyst. Vodafone owns 45% of Verizon Wireless that it is not getting proper credit for. The company does not consolidate Verizon Wireless in its reporting and as a result its significant value is being ignored by the market.

Vodafone does not receive a dividend from Verizon Wireless and that has led to the value of one of its most important holdings not currently being reflected in the current stock price, despite the ongoing growth in revenue. 

Verizon Wireless's cash flow is being used to repay inter-company debt to Verizon. This debt is scheduled to be fully repaid by July 2010, at which point Verizon is likely restore the Vodafone dividend.  The catalyst of Verizon dividends again being paid to Vodaphone later this year is likely to increase the share price.

The stock is currently undervalued in comparison to its peers. The value stock is an excellent investment for growth and income. The stock should trade above twenty five this year and above thirty in the next few years. The generous 6% dividend yield pays us well to wait. 

(Risks to the share price include currency fluctuation. The end of the deep recession in Europe and growth in emerging markets are important to price appreciation. Vodafone is in a highly competitive business and the firm has a complex balance sheet.)

(eWorldvu.com is buying 200 shares of Vodafone (VOD) under the price of 22 in the Model Retirement Portfolio at the Market Open on Tuesday March 2, 2009. As always do your own due diligence prior to making any investment. eWorldvu members currently own long positions in Vodafone.)

http://www.eworldvu.com 

Update on Tuesday, March 2, 2010 at 09:48AM by Jim Smith

Bought 200 VOD at 21.75.