Free cash flow at Verizon Wireless will continue to grow, benefiting its parent companies Verizon Communications Inc. and Vodafone Group Plc.
That's according to a Goldman Sachs research report, which upgraded Vodafone shares from "neutral" to buy" in connection with a bullish outlook on Verizon Wireless, the largest U.S. mobile operator with 107.7 million connections based on third-quarter results.
"We argue the market is underestimating the scope for rapid earnings, and dividend growth at Verizon Wireless ... which we forecast will propel Vodafone's" free cash flow above 10 billion pounds over the next two years, Goldman Sachs analysts wrote in a comprehensive report Thursday.
Verizon Wireless' free cash flow before tax distributions will climb from $13 billion in 2011 to $22 billion in 2014, according to Goldman Sachs projections.
Goldman Sachs analysts forecast that Verizon Wireless will make dividend payments to its parents of $13 billion in 2013 and $15 billion in 2014. Over the summer, Verizon Wireless announced its first dividend payment in years – a $10 billion whopper to be made on Jan. 31, 2012, with Vodafone's share totaling $4.5 billion. The analysts said Verizon Wireless will need to make billions in dividend payments simply for Verizon Communications to afford the dividend payment to its investors because Verizon's landline and enterprise businesses will continue to burn cash in the coming years.
Goldman Sachs expressed optimism in connection with Verizon Wireless.
"Our US Telecoms team expects continued mid-single growth in the US wireless market as favorable market structure gives industry leaders like VZW and AT&T pricing power," the analysts wrote. "We expect Verizon Wireless to outgrow peers as its postpaid smartphone penetration (36% 3Q 2011) catches up with leading rivals (average of 51%), delivering a service revenue growth CAGR of 6% through CY2014."
In the report, the analysts examined several potential long-term strategies between Vodafone and Verizon Wireless, including Vodafone selling a partial stake or its entire interest in the wireless giant. The analysts said the latter scenario was unlikely because in part Vodafone would be on the hook for a significant capital gains tax liability.
