Sector in Focus: Telecoms

As Vodafone confirms that it is in talks to sell its stake in Verizon, we look at what the telecoms sector has to offer investors

Emma Wall 29 August, 2013 | 3:01PM
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Vodafone, one of the key income paying stocks in the FTSE 100, has confirmed it is in talks with Verizon to sell its stake in the telecoms’ joint venture Verizon Wireless.

Vodafone shares increased 9% on the news, as the mobile operator could be in for a £65billion cheque.

But while the market has reacted positively, analysts are divided as to whether Vodafone should offload this part of its business.

Morningstar analyst Allan C Nichols said earlier this month that Verizon Wireless was performing admirably.

“While we think the most likely scenario is a continuation of the status quo, talk of Vodafone selling its stake is increasing,” he said. “If such a deal could be structured in a tax-efficient manner, this could increase the near term value of Vodafone, but would remove one of its best drivers of long-term growth.”

Vodafone’s free cash flow in 2013 benefited from the $3.825 billion dividend it received from Verizon Wireless in December. Selling off a valuable asset could mean that Vodafone becomes a target for M&A from one for the strong emerging market players.

Ralph Brook-Fox, UK equities portfolio manager at Ignis said: “Speculation is likely to centre on Vodafone’s use of the cash as its seeks to reinforce its competitive position by purchasing fixed line assets across Europe. It has also been suggested that Vodafone itself could be on the receiving end of a bid as other operators develop more global ambitions.”

Short term, analysts say that a tax-efficient disposal of Verizon Wireless could push Vodafone’s fair value estimate higher. So for investors who can time the market the sale could prove profitable.

A recent note from Nichols on fellow telecoms company BT Group revealed that analysts were impressed with BT's efficiency measures and broadband projects, but sceptical as to whether the company will recoup the cost of its television venture BT Sport.

BT Group paid £738 million at auction for the rights to broadcast a proportion of the Barclays football Premiership and has shelled out further millions for Aviva Premiership Rugby as well as WTA women's tennis. It also has the licence for American sports channel ESPN in this country.

Analysts are divided as to whether BT will recoup the costs of this venture, but they have raised the fair value estimate from 243p to 280p. The share price is currently 330p. In addition to impressive advances in its broadband roll-out, the company raised its dividend for the third year in a row in fiscal 2013 and plans to increase the dividend by a further 10% to 15% in each of the next two years.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BT Group PLC181.05 GBX0.81Rating
Vodafone Group PLC118.88 GBX0.51Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar