Vodafone leans on Verizon Wireless dividend to retain credit rating

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Vodafone's existing credit rating of A- is increasingly dependent on future dividends from its Verizon Wireless joint venture, according to a warning from Fitch Ratings.

While Fitch said Vodafone's rating is currently stable--helped by its global scale, diverse operations, sound liquidity and stable cash flow generation--slowing growth, most notably in southern Europe, is a growing concern.

The company is well positioned to benefit from increasing data traffic, but the ratings agency said the receipt of substantial and regular dividends from Verizon Wireless is increasingly more important to maintain Vodafone's A- rating, according to a Fitch release.

Vodafone got a boost earlier this month from a £2.4 billion dividend payment from Verizon Wireless, although this is lower than the £2.9 billion dividend the company received last year. Vodafone holds a 45 per cent stake in the operator while Verizon Communications holds the 55 per cent majority stake.

The rating agency believes that Vodafone should continue to receive substantial ongoing dividend from Verizon Wireless, albeit there is limited visibility around the timing of these dividends. However, they are significant relative to Vodafone's free cash flow (before dividends and spectrum costs) of around £5.3 billion to £5.5 billion in the financial year 2013.

However, the German boutique bank Berenberg has lowered its rating on Vodafone to "hold," believing that news from the operator will "remain challenging" throughout the first half of 2013.

While retaining his price target of 185 pence a share, Berenberg analyst Paul Marsch told Proactive Investors he expects service revenue trends to worsen, while the issue of recurring spectrum costs will also rear its head.

Vodafone CFO Andy Halford has also indicated his confidence that the company's investment in Verizon Wireless will enable the UK-based operator to pay high dividends to its shareholders.

"As long as the business develops in the way it has recently there is reason to believe that the shareholders will receive significant sums in the future," Halford told the German financial newspaper Boersen-Zeitung, according to Reuters.

Separately, Halford told the newspaper that acquisitions would stay on Vodafone's agenda, and that any plans to launch an initial public offering of its Indian operations depended on clarity regarding regulatory and tax issues. "Only then will we decide on the timing of an IPO," he said.

For more:
- see this Fitch Ratings release
- see this Reuters article
- see this Proactive Investors article

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