UPDATE: Verizon Wireless May Start Paying Dividend In 2012

18th Jun 2010 15:52

By Roger Cheng Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Verizon Wireless may start paying a dividend in 2012, providing parents Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD) with a rich source of cash. Verizon Chief Financial Officer John Killian first suggested the possibility of a dividend in an interview with Bloomberg late Thursday. He said the door was open for a payout once Verizon Wireless finishes paying down its debt in 2011. A Verizon spokesman confirmed the comments. Verizon Wireless has seen stellar growth and profits over the past few years in its ascent as the nation's largest wireless provider. But the massive amounts of cash generated has gone primarily toward paying down debt accumulated through acquisitions and other investments, with Vodafone in particular getting little monetary benefit. Majority owner Verizon's willingness for a payout underscores the growing need for both companies to draw upon Verizon Wireless's cash flow for their own needs, and provides a firmer target for when it might materialize. "While [Killian's] comment falls short of a definitive commitment, we nevertheless believe the remark is significant, inasmuch as this is the first time, to our knowledge, that Verizon has publicly put a specific date on potential distributions," said Robin Bienenstock, an analyst at Sanford C. Bernstein LLC. It's not the first time Killian hinted at a dividend. Killian told investors in late April during a quarterly conference call that the company would look at the issue again in 2011. "It's an event off into the future," he said. For Vodafone, which owns a 45% stake in Verizon Wireless, the lack of a dividend since 2006 has been a growing concern for investors. Vodafone Chief Executive Vittorio Colao said late last year that the company had to resolve its situation with Verizon Wireless. "The U.S. is clearly the most important thing that we have because it's 37% of our EPS and 0% of our cash flow, so it's a pretty asymmetrical type of situation," Colao said in November during an investor conference. Vodafone declined to comment on Killian's comments. Ivan Seidenberg, chief executive of Verizon, which owns a 55% stake in Verizon Wireless, has said he will only consider a dividend once the venture's debt has been paid off. The possibility of a dividend provided a small boost to both companies. Verizon shares rose 0.5% to $29.23, while Vodafone American depositary receipts rose 0.9% to $21.35. The move would represent a coup for Vodafone, which would see its free cash flow increase by an estimated 30%, Bienenstock said, adding that the company's stock currently trades as if it has no stake in Verizon Wireless. Verizon's stock also trades lower than rival AT&T Inc. (T) because Wall Street already assumes an eventual cash payout to Vodafone, according to Auriga USA LLC analyst Chandan Sarkar. "We believe investors may choose to value Verizon at a discount as they better recognize the implications of Vodafone owning a 45% stake in the portion of Verizon's business that generates 70% of its cash flow today," he said. But cash from the wireless business would secure both Verizon and Vodafone's commitments to pay a dividend to their shareholders. A dividend would also dash away speculation that the two telecommunications giants would merge in a trans-Atlantic deal, analysts say. Seidenberg has also said he sees little compelling reason to merge with Vodafone. But it does keep the door open to Verizon eventually buying out Vodafone's stake in Verizon Wireless, something Seidenberg has regularly said he was willing to do. -By Roger Cheng, Dow Jones Newswires; 212-416-2153; [email protected] (END) Dow Jones Newswires June 18, 2010 10:52 ET (14:52 GMT)