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.
Photo Credit: Stuart Miles/FreeDigitalPhotos.net
Thanks for the update.
What are your thoughts on VOD vs. T? Both are in you portfolio, so do you currently find a better value in one of them than the other?
the stats will tell you T is better, but some people have a particular affinity to vod’s diversification.
vested in VOD and Singapore Telecons.
Monk,
Thanks so much for stopping by. Always good to hear from you.
I find VOD a much more attractive opportunity currently. The lower debt load, diversification across many more markets, similar (or larger) yield, lack of significant wire line business and similar valuation makes VOD the more compelling buy right now.
Best wishes!
Drizzt,
Thanks for the comment.
What stats, specifically, favor T? I don’t think I can come up with many that would favor T right now. VOD is cheaper by many metrics, has less debt and has a higher anticipated growth rate. T primarily operates in a maturing U.S. market. I like T, but not at current prices.
Singapore telecoms must be interesting. Limited competition on a small island, no?
Best wishes!
When you mentioned in your previous post that you were looking at European equities and made a recent buy, I was fairly certain it would be VOD. 🙂 I may also increase my nascent position in VOD soon.
Nice buy DM. It’s always great to put money to good use instead of spending it! Don’t you think so too?
Speaking of T, they released their 2011 annual report recently. It’s a good read and reaffirms my conviction with the company.
As for buys, I don’t know. I hate buying at the top and the market just made a new high. Plus, I already added plenty of new capital this year so it doesn’t hurt wait. Maybe next month when another round of earnings come around and companies miss their estimates. Then it’ll be my time to buy! I’m sitting on 9k of cash and I don’t want to be the chaser. That’s never fun…
Deedubs,
You had it right with VOD!
I know you started your position with VOD not long ago, so you must be bullish on this company as well. I think, when looking at all the numbers, it’s a pretty strong buy right now. It could certainly fall further with a market sell-off, but I think today’s price represents some good long-term value.
Take care!
Henry,
It’s absolutely better to put your money to work with appreciating assets, rather than buy more “stuff” you probably do not need.
You’re sitting on $9k? That’s a large chunk of change my friend. I hear you on not chasing stocks. I had considered sitting on some cash myself, but I really do believe in the power of compounding, and money can’t compound if it’s just sitting there. I think in any market there’s value to be found, and I believe VOD is one of those value plays right now.
Best wishes.
Nice addition to your VOD position DM. I’m very much interested in VOD myself. What are your thoughts on that special dividend? I’ve read a few articles that suggest it will be a commone occurrence. If that turns out to be true it will indeed be a good investment, but even at a yield of 5.5% you are not doing bad.
That’s true, time is an investor’s best friend. However, the Warren Buffett inside me is screaming wait for better value. Usually I dollar cost average and waiting a month until buying won’t be such a killer. But I feel ya, compounding is such a power thing.
BTW, does anyone know any good dividend growth reinvestment calculators? I’ve been using various ones, but they keep giving me different results. I might end up making my own on excel. I’m looking for something that takes into consideration initial investment value, current dividend yield, dividend growth, monthly contributions, and time horizon.
I’m currently using this: “http://www.dividend-calculator.com/drip.php”. The values it gives me is pretty ridiculous.
I’ll have to look at VOD one of these days.
I’m not currently in any telcos (I’ve been picking MLPs for my high-yielders instead), although I’ve looked into T, and found that it was mediocre. I’m not a fan of Verizon as an investment, although I use their wireless service and it’s better than T’s around here, so VOD’s holding in Verizon’s wireless business is appealing.
I certainly like VOD over T at the moment, although I don’t hold any telcos currently. The entry yield seems really attractive and if you can keep pocketing that “special” dividend, then your looking at a crazy good yield for a really great company.
I recently picked up 100 shares of Seadrill (SDRL) on 3/15 for a $37.94 cost basis and an entry yield of 8.43%. I also broke the $30k mark for my portfolio this month (w00t!).
Nice post, take care…
DPS
Hi DM!
I don’t know if you remember, but in December we had (almost) the exact same amount of money, in January we bought Philip Morris on the same day and on the 16th of March we bought Vodafone on the same day. 🙂 However, I purchased 100 shares in Vodafone for USD 26.45 per share, so a little bit higher than you. I do like VOD a lot and I think the fact that VOD is trading around its book value per share and deliver a strong dividend yield is making a good base too rely on.
Best regards
Henry,
I understand what you’re saying, and you’re making a good move. Nothing wrong with passing up the pitches today for a fatter pitch tomorrow. Nobody is going to call strikes. Fatter pitches will always come, it just takes patience.
I’ll have to see if I can find you a good reinvestment calculator!
Take care.
The Stoic Investor,
Thanks for the question.
It’s hard to say with the special dividend. I’m basically assuming that it’s a one-time occurrence and I’m basing my investment thesis around the standard dividend. If the special dividend does become recurring, then that is simply icing on the cake and makes this investment that much more attractive. To be honest, I don’t see it becoming an annual recurrence, but it VZW could certainly distribute money to VOD every couple years or so, which would also be nice.
Best wishes!
DPS,
Nice move on SDRL. I’ve looked at it from time to time, and it just doesn’t fit what I’m looking for. However, there are a lot of fans of that business and I know the CEO is admired in quite a few circles. That’s an aggressive investment, from what I understand. I wish you the best with it and keep us updated!
Take care.
EyesOnTheMoney,
Great minds think alike! That’s fantastic that we made two same investment moves on two exact same days. That doesn’t happen very often!
I agree with everything you’re saying about VOD. It’s trading for book value with a solid yield and a great business behind it. I think the current price represents a good value for a long-term investor.
Keep in touch!
Its good that you have done your homework well before investing. It should definitely give good returns in long term
Hi DM,
I have included this post at my website weekly roundup #2
Justas,
Glad you enjoy the blog. Thanks for stopping by!
Looking forward to what you think of VOD.
Best wishes!
Nice site 🙂 Will be following. I will analyse VOD with 1Q to see what up with that company. Whats with high div yield there 🙂
I think Vodafone Group is an excellent pick because so many european stocks are so out of favor right now. I have always been a big fan of buying something when everybody else is selling.
How you like VOD now? What are your thoughts on the purchase from VZ? I’m waiting to see what happens on Tues.
Cheers,
Skottoman
Skottoman,
I’m using a wait-and-see approach right now with Vodafone. Overall, I’m not a big fan of selling the Verizon wireless assets, as that is the brightest star in Vodafone’s galaxy. The question becomes will they be able to invest that capital elsewhere and earn a better return? Are there better assets currently available out there? I’ll be seeing what VOD management does with this capital, which should be quite sizable. Some of it should be returned to shareholders. We’ll see how it goes, but I’m happy with VOD as it stands – with 45% of VZW.
Best wishes!