Sunday, December 11, 2011
I don't write articles like this very often, because as a long-term dividend growth investor I don't sell stocks very often. But, I did recently close out a position of mine that I had been holding for most of the year. I did this not because of a reduction in share price, creating a loss for me, but because of a deterioration in what was already poor fundamentals. Unfortunately, I make mistakes (often!) and I certainly made one with investing with this company. I chased yield, and I didn't analyze the fundamentals as much as I should have.
I sold all 125 shares of my holdings with Telefonica S.A. (TEF) (ADR) on 12/7/11 at $18.44 per share. I want to make it clear that I did not sell my TEF holdings because of fear, or because the share price has gone down. I usually look forward to a drop in the share price of a holding of mine, as I simply look at that as an opportunity to average down on my holdings. I sold TEF because of poor fundamentals. The debt load is, in my opinion, unsustainable and out of control. Management has not really put a clear and concise plan in place to reduce it going forward. They have talked about selling underpeforming assets, but have not been clear as to which are on the table. It seems that the poor assets on the books are unattractive to outside investors or companies. At the end of 2010, they had over 53 billion euros in long-term debt (almost $72 billion dollars) and there appears to be no plan in view to reduce that. The debt to equity ratio currently sits at 2.6, which is too high even for a telecommunications company in my opinion.
As these debts reach maturity TEF must either pay that mature debt or roll it over into new debt. The problem is that with the euro zone crisis, and Spain's individual problems, the interest rates on TEF's debt is likely only to increase in the short-term. I'm not concerned about TEF being able to meet its debt obligations in the short-term, but I am concerned about this company long-term and with this much debt on the books I just simply feel better looking at other opportunities to put my investment capital to work. The massive amount of debt puts constraints on its ability to pay out its huge dividend. The dividend policy, with this amount of debt on the books, is very aggressive and in my opinion shows lack of long-term vision and management. I view the large dividend as unsustainable long-term.
In the end, I should have never invested with TEF, as the poor fundamentals and extremely aggressive dividend policy do not, in my opinion, make it a stellar long-term investment. I was blinded by the huge yield, and I'm disappointed in myself for chasing yield as it goes against my investment thesis as a conservative, value-oriented dividend growth investor.
I learned a lesson here and paid for it out of my own pocket. The short-term capital loss I experienced as a result in the destruction of the share price was partially mitigated by the large dividend I received in 2011, as well as the fact that the loss offsets some of the short-term capital gains I received this year. I had over $3,000 in short-term capital gains for 2011, so I wanted to get TEF off my books and reduce some of those short-term gains, and consequently, my tax bill come 2012.
With the freed-up capital after the TEF sale, and a commission check I received this past week at work, I put that money (which totaled almost $5,000) to work for me in quality, long-term investments that I felt much better about. I'll be discussing my recent purchases very soon!
I'll update my Freedom Fund in early January to reflect the recent sale of TEF.
What about you? Getting rid of any underperformers before the end of the year?
Thanks for reading.
Edit: Corrected debt numbers.
Photo Credit: jannoon028