Today I bought shares of Vodafone Group (VOD), a multinational telecom company headquartered in the United Kingdom. This is my third purchase of VOD, with previous purchases occurring in March and May of 2012.
Vodafone's recent operating results have been mediocre, mainly due to sustained weakness in Europe. However, its business is doing better elsewhere, with continued growth in emerging markets such as Turkey and India, and gains in the U.S. through its 45% stake in Verizon Wireless. Back in November 2012, Vodafone increased its "interim" dividend (the first semi-annual dividend for 2013) by 7.2%, putting the company on track for its 14th consecutive year of dividend growth (in British pounds; due to exchange rate fluctuations, they have a shorter streak in U.S. dollars). At the same time, the company received a dividend payment of about £2.4B from Verizon Wireless, of which £1.5B will be used for share buybacks.
I consider VOD to be an attractively valued stock. It does not currently have a meaningful P/E ratio because of a net loss due to write-downs in troubled Spain and Italy. Although that might be considered a red flag, note that the company has a stable balance sheet and sufficient free cash flow to cover its dividend. Other valuation metrics include a PEG of 1.5, P/S of 1.7, and P/B of 1.1, all of which point to modest undervaluation. Using a Dividend Discount Model with a dividend growth rate of 5% and a discount rate of 11% (which equals the current yield plus the dividend growth rate), I calculate a fair value of $26.23. Morningstar gives a fair value of $32.00 and a 4-star rating, whereas S&P gives a fair value of $24.80 and a 4-star rating. The average of those three estimates is a fair value of $27.68, which implies an 11% margin of safety at the current price. More conservatively, one could argue that the stock is fairly valued. The stock is trading 18% below its 52-week high and today it crossed the 6% dividend yield mark when its price dropped more than 2.5% to a new 52-week low.
I bought 45 shares of VOD at the price of $24.65 per share, giving me a total of 125 shares at an average price of $26.07 per share and a 5.71% yield on cost. My previous cost basis was $26.87 per share, so this purchase reduced it by 3.0%, which is a nice example of averaging down. (Incidentally, VOD is one of only three stocks in my portfolio for which I can average down.) This purchase increases my annual dividend income by $67.46, resulting in a forward 12-month dividend total of $2,217.
This was a relatively small purchase that used up nearly all the cash in my taxable account. However, I still have $5,000 in my Roth IRA to be invested, so my next few purchases will be in that account. If the stocks on my watch list are dragged down in a broad market decline like we had today, then I might make another purchase soon.