Wednesday, February 20, 2013

Stock Bought: VOD

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.

17 comments:

  1. I did notice the drop today and like the company long-term. It is currently my 3rd largest position behind INTC and NSC so I don't plan to add more soon. However, if there is much more weakness in share price I will have a hard time not adding a little more.

    It is always nice to lower your cost basis on core holdings.

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    1. AAI: VOD is my 9th largest position after this purchase, but I'm satisfied with its current weight in my portfolio (4.25%), so I will not be looking to make an additional purchase soon. However, it was indeed nice to lower my cost basis by a few percentage points.

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  2. VOD is on my short-term buy list. I am thinking about pulling the trigger soon.

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    1. Dividend Warrior: Thanks for your comment. VOD sure is tempting at the current price.

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  3. DGM,

    Great buy here. VOD is a cheap stock right now in a fully valued market. Cheap valuation, global operations, strong yield backed by a growing dividend and a brand name product.

    I've thought about adding to my position with the recent weakness, but at 150 shares I'm pretty fully invested in Vodafone right now. It's one I'm watching though. The big payout comes later in the year, so there's plenty of time to jump in.

    Best wishes!

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    1. DM: Thanks for your comment. Now that I'm at 125 shares, I also feel fully invested in VOD, so I have no plans for additional purchases. It will be nice when the final dividend rolls in later this year!

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  4. I like the buy. I've been looking for a chance to get in under $25 but stopped tracking it closely. I actually havent really followed tge markets since kast thursday bc I've been busy so its nice to see a great company go on sale.

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    1. PIP: Thanks for your comment. I also figured that a price below $25 would be a good buying opportunity, so I decided to go for it.

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  5. DGM--- Great buy! Mostly because I opened a position in VOD today as well :-) I thought I had missed the opportunity back when it traded at 25.00, but wait long enough and you always get a second chance, well not always but you know what I mean.

    Cheers

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    1. Stoic: Thanks -- great minds think alike! It's good to know that our patience paid off and we were able to pick up some shares at a nice price.

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  6. I also opened a position in VOD yesterday as well. I bought it for the dividend, but do you anticipate that this stock will experience any capital appreciation eventually? I bought JNJ several years ago, sold it last year in frustration, and now it's finally broken out of its long time trading range.

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    1. kolpin: It's good to hear that another investor bought some VOD shares at a good price. To answer your question, I do think there will be capital appreciation in the future when the market reappraises VOD closer to its intrinsic value. However, I do not know how long it will take -- it could be anywhere from a couple of weeks to a couple of years. As a value-oriented dividend growth investor, I am fine with collecting dividends while I wait for capital appreciation.

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  7. The only thing that concerns me about Vodafone is the trouble in the eurozone this must be having a negative impact on the sales and earnings of the company.

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    1. QS: Vodafone is being hurt by the troubles in southern Europe, but at some point the situation will stabilize and growth should resume. In the meantime, the company can continue to grow in emerging markets and reap the benefits of its stake in Verizon Wireless.

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  8. HI DGI, Any comments on the VOD VZ deal, is it time to revisit and make changes to the VOD position or leave it the way it is for now. Appears the deal will be done by Q1 of 2014. Thanks much Appreciate your insight and hope your new job is keeping you busy.

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    1. Anonymous: Thanks for your comment. I have written a short post with some details about the deal:

      http://dgmachine.blogspot.com/2013/09/implications-of-verizon-wireless-deal.html

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