When America was on the doorstep of the Roaring '20s and the
birth of modern American consumerism, the predecessor to
SunTrust Bank (
made a shrewd investment.
went public, the bank was part of the underwriting group. The
J.P. Morgan (
, took its $100,000 fee in cash. SunTrust took its payment in the
company's newly issued shares, which came out to be around
$70,000. The stock certificates and Coca-Cola's secret formula
sat in the bank's vault for nearly a century growing to nearly 30
million shares worth more than $2 billion and paying around $53
million annually in dividends.
Fast-forward to 2012. After a brutal financial crisis,
SunTrust decided to do what many considered sacrilege. After
being battered by a soft economy, tighter government regulation
and bad loans, the company decided to sell its stake in
Coca-Cola, use the cash to clean up its balance sheet and focus
on its future.
To SunTrust's credit, it followed the old Wall Street axiom
"Sell when you can, not when you have to." The bank did wait
until the crisis had subsided and the price of Coca-Cola's stock
had recovered from its crash lows to fetch a more attractive
||After Vodafone's initial investment in Verizon 10 years
ago, the company will take in around $130 billion in cash
when all is said and done.
The latest example of a smart company cashing in some chips
when it's time is
. One of my main reasons for owning shares of Vodafone, which I
profiled a year ago, was the company's 45% stake in U.S. wireless
Vodafone's investment has paid off. After an initial
investment of $20 billion 10 years ago, the company will take in
around $130 billion in cash, Verizon stock and notes when all is
said and done. That comes out to an average annual return of 55%,
not including dividends. That's pretty strong in anyone's
That same decade has treated Vodafone investors just as well.
Not including dividends, shareholders have gathered annual
returns of around 16%. Dividends would boost that to an annual
average of well over 20%.
And thanks to the Verizon deal, investors will continue to
reap rewards. Vodafone shareholders are scheduled to receive a
distribution that represents about 70% of the sale in cash and
In addition, the company plans to increase its common dividend
by 8% in 2014. That's on top of an already generous 4.7%
So now what? Do Vodafone holders take the money and run? Not
on your life.
Kings Of The Wild Frontier
Currently, 70% of Vodafone's revenue comes from Western Europe.
We all know the growth story there: There is no growth.
||Vodafone has been gearing up for an ambitious and
well-financed stab into emerging and frontier markets.
Herd wisdom would tell us that in selling its crown jewel, the
Verizon stake, the company is condemning itself to stagnant
growth mediocrity. Quite the contrary. Vodafone has been gearing
up for an ambitious and well-financed stab into emerging and
frontier markets. It's the frontier market thesis that excites me
Africa, one of the world's most promising frontier markets, is
probably Vodafone's most impressive growth stories. Profits in
its African division are set to outpace those of its Southern
European division in as little as three years, the company says.
In fact, earnings are growing as quickly as 50% in some regions
such as Ghana, the Democratic Republic of Congo, Mozambique,
Tanzania and South Africa.
Other frontier and emerging markets important to Vodafone's
growth strategy include the Middle East, India and the emerging
Asia Pacific region. As of the quarter ended June 30, the
emerging and frontier divisions generated $4.7 billion in
revenue. This number grew organically (no accounting tricks!) by
7.5% from last year while the company's business in developed
markets shrank by 7.2% during the same period.
Lean And Mean
Vodafone's big haul with the Verizon sale will turbocharge an
already rock-solid balance sheet. Long-term debt to capital sits
at only 28%, impressive for a $158 billion telecom company.
Although telecoms are cash-flow monsters, they typically shoulder
a lot of debt (which is why they have to be cash-flow monsters).
Vodafone has managed to increase its dividend by nearly 50% over
the past nine years.
So with a mountain of cash, Vodafone is ready to ramp up its
adventure in sub-Saharan Africa. The cash will come in handy. In
a market where there is little to no infrastructure (including
electricity in some instances), network build-out is imperative.
But in a region where wireless handset penetration is expected to
reach 85% by 2015, the investment is worth it.
Risks to consider:
While Vodafone's foray into frontier markets is bold, it's
also fraught with risk. Again, the capital investment will be
substantial, and in an area known for governmental corruption
where the bulk of the population lives on less than $2 per day,
the challenges are numerous. However, although the European
business is stagnant, it is predictably so. This will provide the
company with dependable, predictable cash flow that will allow it
to operate comfortably and provide value to shareholders while it
executes its growth strategy.
Action to take -->
Vodafone currently trades near $33. The stock has climbed over
30% this year, excluding dividends. While that feels stretched
out, based on the dynamics of the stock, there's still value at
this level. The forward price-to-earnings ratio is a moderate
11.4. Based on the Verizon sale windfall contributing to
earnings, the company's strong financial position, and its
emerging-market growth strategy, a 12-month price target of $42
sounds about right. Factoring in the 4.7% dividend yield, that
would be a total return of nearly 33%.
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