Friday, November 23, 2012

Dividend Mantra Buys Vodafone (VOD) Shares

I've been particularly active in the market as we've continued to see drops in all the major indexes on a daily basis. I've injected quite a bit of fresh capital into my portfolio over the last week or so, and perhaps I made those moves a little early. But that assumption really depends on your perspective. I look at every share I purchase in a publicly traded company as an additional piece of ownership, because that's essentially what stocks are - pieces of ownership in a business. So, I'm simply buying a percentage of future profits with today's money, and by doing so I'm delaying gratification in exchange for a return on my money. Obviously, the cheaper each share is the better off I am as I can then purchase a larger percentage of a business for the same amount of money.

However, what I really tend to look at is future expectations. If you buy shares in McDonald's for $86.08 a piece, as I did recently, or if you buy them for today's closing price of 84.05 will it really matter all that much 20 years from now when MCD shares are available on the market for $700 each? Probably not. That's not to say that I don't believe that purchasing stocks on a strong value basis isn't important. Quite the contrary, as I believe valuation is paramount to a dividend growth investor's long-term success and total returns. I just don't think an individual investor should hang their head low because a stock they purchased dips multiple percentage points soon afterward. I advocate purchasing quality companies at attractive long-term prices, not trying to time the market. Time, not timing, will always be your best friend as a long-term value-based dividend growth investor.

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) on 11/9/12 for $26.25 per share. This adds to my current position, that was at 100 shares before this addition.

I decided to invest further capital into Vodafone for a number of reasons. They are the second biggest wireless telecommunications company in the world, and they operate on a global scale with majority or joint control in 22 countries. The lack of any significant landline business is attractive, as I believe the shift to wireless communications is permanent. The timing of my purchase was a bit ill, as VOD has slid further since my purchase. I decided to buy shares when I did because I believe VOD was being punished due to the uncertainty over a Verizon Wireless dividend, as VOD only owns 45% of this joint-venture. I anticipated another dividend to be paid out to parents Verizon Communications (VZ) and Vodafone (VOD), which I wascorrect about. Vodafone will receive $3.83 billion from Verizon Wireless, in the form of a special dividend.

What I didn't anticipate, however, was particularly weak operations in southern Europe, particularly Italy and Spain. VOD reported a loss for the first half of 2012, reflecting revenue loss and large impairments. The strength of Verizon Wireless operations, and the special dividend, certainly helps, but does not quell all. 

VOD is targeting a 7% growth rate in the dividend on an annual basis, which is particularly attractive considering what is already a high yield. They have already raised their interim dividend from 3.05 pence to 3.27 pence per ordinary share (1 ADR is 10 ordinary shares), which is a 7.2% raise. The final dividend will likely be announced in the summer of 2013. Taking the new interim dividend, and the last known final dividend and using current exchange rates, VOD yields 6% right now. That is not factoring in any special dividend from the Verizon Wireless venture, which was a nice surprise last year. That yield is also not factoring a raise on the final dividend, which will likely come to fruition. As of now, VOD has only announced a 1.5 billion pounds share buyback program with the monies received from Verizon Wireless.

These new VOD shares will add $75.46 to my annual dividend total based on today's exchange rates. Overall, I'm quite happy with this purchase. VOD provides a service that is becoming increasingly ubiquitous in everyday life. People are starting to consider their smart phones and tablets a necessity, and no longer a luxury. VOD has a fairly strong balance sheet, and has a management team that is very shareholder friendly. Shares are on the rocks right now, after revenue loss and weak European operations, so this is a great time to scoop up shares for the long-term. I think this is a fundamentally sound business that is just having a tough year in a rocky macroeconomic environment. I'll continue to monitor this holding and see how new services, like its new Red plans, add to revenue. If shares continue to slide I'd be interested in adding to my position further.

With this addition, I still have 29 positions in my portfolio as I was already long VOD.

Some analyst opinions on my recent purchase:

*Morningstar currently rates VOD as a 4/5 star valuation.
*S&P currently rates VOD as a 4/5 star Buy.

I'll update my Freedom Fund in early December to reflect my recent addition.

Full Disclosure: Long VOD

What are you buying?

Thanks for reading.

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