Sunday, March 18, 2012
The markets have been absolutely screaming lately. For the first time in history, this past week the DJIA closed above 13,000 points, the S&P 500 closed above 1,400 points and the Nasdaq Composite closed above 3,000 points all on the same day. That tells me that the markets could be getting a bit overheated, due for a pullback after the extended rally that has been going strong since the end of 2011. This could be a great time for an individual investor to build a sizable cash position, awaiting a pullback before deploying some "dry powder". I had seriously considered doing that myself before I made my last purchase, adding to my MCD position. I decided, however, to continue along the path I set forth for myself when I first started this journey. I decided to continue to purchase what I believe are quality dividend growth stocks at attractive long-term prices, regardless of what the overall stock market is doing. And, so I purchased yet again.
As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.
I purchased 50 shares of Vodafone Group Plc (VOD) (ADR) on 3/16/12 for $26.34 per share. Vodafone is trading for, what I believe to be, a fairly attractive valuation, especially in light of the U.S. stock market performance YTD. European equities have not been as strong this year due to a number of concerns, not least of which being the eurozone debt crisis. VOD has gone -5.78% YTD, compared to the strong S&P 500 at +11.65% YTD. This under-performance interests a value investor like myself, who continually looks to invest in strong businesses trading at a discount to their intrinsic value as well as the market itself.
Vodafone is the second largest wireless phone company in the world. VOD is trading for a 12.08 P/E ratio, a 1.0 P/B and a 1.9 P/S. When one of the largest businesses in its field is trading at book value I take notice. VOD is especially interesting when you look at their geographical diversification and the fact that they own 45% of Verizon Wireless here in the United States. By buying VOD, you're not only getting a major international telecommunications company, but you're also investing in Verizon but avoiding the debt and lingering legacy costs relating to their wire line businesses.
VOD pays its dividend as many other European businesses do: in two separate semi-annual payments, one coming early in the year in the form of an interim dividend, and the other coming late in the year as a final dividend. The second dividend is usually the much larger of the two. Calculating VOD's current yield is a bit difficult as the final dividend has not been announced yet, and you also have to consider the currency conversion from British Pound Sterling to U.S. Dollar. Based on the interim dividend of $0.47 and using last year's final dividend of $0.99, the yield of VOD on my purchase is 5.5%. One item to consider is that VOD paid out a special dividend of $0.62 per share with the interim dividend, based on a payout from its 45% ownership of VZW. It's unclear whether or not this will be on-going, but if it is that would be extremely welcome. Based on this special the dividend, the yield is closer to 7.9%. Two things to consider are the fact that the final dividend will likely be larger this year than last, due to VOD's ongoing commitment to growing the dividend by 7% per year, and the fact that as a U.S. shareholder there are no foreign withholding taxes on the ADR shares of VOD. Based on the standard payout, this purchase should add $73.00 to my annual dividend total. If the special dividend becomes an annual recurrence, my dividend total will increase correspondingly.
This purchase doubled my holdings with VOD, as I took an opportunity to average down on my position after I made my first purchase of 50 shares of VOD last November for $28.85 per share. This brings my cost basis of 100 shares of VOD to $27.59 per share.
Overall, I feel confident about the future of Vodafone. They are a solid company that has operations in over 30 countries worldwide and a solid balance sheet with a debt/equity ratio of 0.4. With a more attractive valuation than many other telecoms, coupled with a strong yield and solid balance sheet, as well as the fact that they have very limited wire line businesses, I think this is a solid business at the current price.
I still have 25 positions, as I was already long VOD.
Some analyst opinions on VOD:
*Morningstar currently rates VOD as a 4/5 star valuation.
*S&P currently rates VOD 4/5 star Buy.
I'll update my Freedom Fund in early April to reflect my recent purchase.
What are you buying?
Thanks for reading.