Verizon Wireless Dividend Creates Smoke Screen over Verizon and Vodafone Merger

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Verizon Communication Inc. (NYSE: VZ) should be a story all about the dividend news today after it said that it would pay out a $7 billion dividend. However, it is not the main news because this simply draws attention away from the real issue. The real story now is that Vodafone Group PLC (NASDAQ: VOD) likely will not get a huge bid by Verizon for the rest of the Verizon Wireless unit.

On Monday night came news that Verizon Wireless would pay out $7 billion in a dividend to co-owners Verizon and Vodafone. Verizon Communications owns 55% of Verizon Wireless, so it will receive $3.85 billion. Vodafone owns 45%, and it is set to receive $3.15 billion. Both payments will be made toward the end of June.

There are two takes here. One is that the move is by Verizon Communications to force a position for a buyout of Verizon Wireless. The other is that the move is meant to appease Vodafone and to keep from having to cough up tens of billions of dollars that would require a huge debt or equity offering to finance the deal.

Our view is that the dividend is move intended to kick the can down the road on any major M&A transaction. Verizon already greatly underyields rival AT&T Inc. (NYSE: T) on its dividend, at 3.9% versus 4.8%. This move may allow Verizon to catch its dividend back up and perhaps deal with the Vodafone stake in Verizon Wireless in pieces, or at least further out on the calendar.