Vodafone: A Good Investment?

In a recent blog post surveying the attractiveness of individual FTSE 100 stocks Vodafone came 2nd with an expected annual return of 10.8%. The figure was based on the average 3 year dividend which came in at 5.1%. The current dividend yield is 5.5%, with a 7.5% analyst forecast for 2013. The dividend for 2014 is estimated at 13.79 compared to 9.52 for this year. That gives an almost 45% increase in the dividend over the next two years. Being conservative I put a 6% annual growth rate on the dividend in the model (which is 75% lower than current analyst estimates).

So on paper the figures are pretty impressive. Vodafone is a mobile telecoms giant with over 150m customers worldwide and good exposure to a numbers of developing markets, most notably India and Turkey.   

Is it too good to be true?

Scratching under the surface uncovers a few less desirable features.

Insider Selling

Last week their CFO sold £1.7m of his Vodafone stock which was a significant stake reducing his total holdings by almost 40%. In February their Regional CEO sold £900k worth of shares reducing his holding by almost 30%. If you go back to August 2011 over £5m worth of stock was sold by the directors. Very little insider buying has happened over this period and none of the amounts have been all that significant. Of course there could be circumstances when a director needs to  sell some stock for some personal reason but the scale of the deals and the fact that a large number of the insiders are selling at the same time seriously concerns me especially as the stock looks so attractive on paper.  

On the 17th May Vodafone broke it's 100 day support line suggesting a downtrend is imminent.

The weak price action coupled with the serious insider selling would certainly discourage me from investing in this stock. The high analyst estimates also seem a bit too optimistic for me. Sure, Vodafone has exposure to growing emerging markets but this is still a very competitive sector . The dividend is a clear appeal to many investors and is currently covered well but the cover going forward, especially with the generous dividend increases, looks a bit tight. If the directors aren't confident enough in their own business to keep holding the stock then neither am I.

FTSE100: Individual Stocks

Below is a table showing the expected annual returns on a long term holding of the following list of FTSE100 stocks. I've ranked them in order of total expected return based on the model I outlined in the entry on stock valuation.

All the data I have used is from digitallook.com. Analysts' forecast is the annualised dividend growth rate over the next 2 years. So if a share currently pays a 10p dividend and the forecast dividend for 2014 is 12.1p then the annualised dividend growth will be 10%pa. I've limited the growth rate to 15%, if a stock has an analyst growth rate higher than this, say 20% I have substituted 15% into the table below for the model. The reason for this is that high growth rates for large cap stocks are unsustainable in the long run.

The 3 year average yield is the total dividend paid over the last 3 years divided by 3 and then divided by the most recent share price.

I've omitted stocks with negative dividend growth forecasts (Eurasian, Kazakhmys, Man Group and Fresnillo), erratic dividends (BP), no dividends (Lloyds, RBS and Int Cons Airlines), or without 3 years track record of making dividend payments (GKN, Anglo American, ITV, Wolseley, Evraz, Carnival, Glencore, and Polymetal). That still leaves 84 stocks in the FTSE100.

As the stocks in the FTSE100 are large cap I have used a factor of 40% on the analyst growth rates for the model (for FTSE250 stocks I would use 33%).

I have used the adjustment factor which I outlined in a previous post, but have been conservative and not used any positive adjustment factors.

	Share		Price	Analysts' forecast*	3yr average yield	Growth	Adjustment		Total
1	Aviva	269		3.6%	9.4%	1.4%	0.0%	10.8%
2	Vodafone	174		15.0%	5.1%	6.0%	-0.4%	10.8%
3	RSA	101		3.1%	8.7%	1.2%	0.0%	9.9%
4	Standard Life	206		5.2%	6.3%	2.1%	0.0%	8.4%
5	L&G	111		11.7%	4.5%	4.7%	-1.0%	8.2%
6	Resolution	203		3.6%	6.7%	1.4%	0.0%	8.1%
7	BAE	272		3.3%	6.4%	1.3%	0.0%	7.7%
8	BT	207		14.6%	3.6%	5.8%	-2.0%	7.4%
9	SSE	1359		4.5%	5.5%	1.8%	0.0%	7.3%
10	ICAP	341		3.5%	5.8%	1.4%	0.0%	7.2%
11	Admiral	1116		15.0%	3.4%	6.0%	-2.4%	7.0%
12	AstraZenica	2632		2.0%	6.2%	0.8%	0.0%	7.0%
13	HSBC	514		7.7%	4.6%	3.1%	-0.9%	6.8%
14	National Grid	685		2.3%	5.6%	0.9%	0.0%	6.5%
15	Centrica	313		6.9%	4.5%	2.8%	-1.0%	6.3%
16	GlaxoSmithKline	1417		6.2%	4.6%	2.5%	-0.9%	6.2%
17	Aberdeen AM	240		15.0%	3.1%	6.0%	-2.9%	6.2%
18	M and S	348		5.6%	4.7%	2.2%	-0.8%	6.1%
19	British Land	495		2.7%	5.3%	1.1%	-0.2%	6.1%
20	RDShell 'B'	2081		2.7%	5.2%	1.1%	-0.3%	5.9%
21	Morrisons	273		11.7%	3.5%	4.7%	-2.3%	5.9%
22	Tesco	310		5.3%	4.5%	2.1%	-0.9%	5.7%
23	BATS	3050		9.7%	3.7%	3.9%	-1.9%	5.6%
24	Imperial Tobacco	2400		10.7%	3.5%	4.3%	-2.2%	5.5%
25	Sainsbury's	296		1.4%	5.1%	0.6%	-0.4%	5.3%
26	Reed Elsevier	488		5.6%	4.3%	2.3%	-1.3%	5.2%
27	Ashmore	326		6.0%	4.0%	2.4%	-1.5%	4.9%
28	United Utilities	649		1.0%	4.9%	0.4%	-0.5%	4.8%
29	BHP Billiton	1704		8.4%	3.4%	3.4%	-2.4%	4.3%
30	CRH	1129		2.4%	4.4%	0.9%	-1.1%	4.3%
31	Old Mutual	143		12.1%	2.8%	4.8%	-3.3%	4.3%
32	Vedanta	967		8.3%	3.4%	3.3%	-2.4%	4.2%
33	Rexam	393		10.8%	2.9%	4.3%	-3.1%	4.1%
34	Standard Chartered	1327		7.7%	3.4%	3.1%	-2.4%	4.1%
35	Capita	611		8.8%	3.2%	3.5%	-2.7%	4.0%
36	Barclays	182		12.8%	2.6%	5.1%	-3.7%	3.9%
37	Land Sec	711		3.7%	4.0%	1.5%	-1.6%	3.9%
38	Prudential	684		7.4%	3.4%	3.0%	-2.4%	3.9%
39	Unilever	2029		15.0%	2.2%	6.0%	-4.4%	3.8%
40	WPP	782		12.7%	2.5%	5.1%	-3.9%	3.6%
41	Sage	254		7.0%	3.3%	2.8%	-2.6%	3.5%
42	Amec	992		12.1%	2.5%	4.8%	-3.8%	3.5%
43	Pearson	1142		6.2%	3.4%	2.5%	-2.4%	3.5%
44	Hammerson	422		3.8%	3.8%	1.5%	-1.8%	3.5%
45	IMI	880		9.0%	2.9%	3.6%	-3.1%	3.4%
46	Schroders NV	995		4.9%	3.6%	1.9%	-2.1%	3.4%
47	G4S	276		9.3%	2.9%	3.7%	-3.2%	3.3%
48	Kingfisher	280		11.3%	2.5%	4.5%	-3.8%	3.3%
49	Smiths	1015		5.4%	3.4%	2.1%	-2.3%	3.2%
50	Next	2996		9.7%	2.7%	3.9%	-3.4%	3.2%
51	BSkyB	700		8.8%	2.9%	3.5%	-3.2%	3.2%
52	Tate & Lyle	670		5.0%	3.5%	2.0%	-2.3%	3.2%
53	Hargreaves Lansd	474		15.0%	2.0%	6.0%	-4.9%	3.1%
54	Severn Trent	1701		1.5%	4.0%	0.6%	-1.6%	3.1%
55	Compass	634		9.8%	2.6%	3.9%	-3.6%	2.9%
56	Diageo	1514		8.9%	2.5%	3.6%	-3.8%	2.3%
57	Rolls Royce	808		12.9%	2.0%	5.2%	-4.9%	2.2%
58	SABMiller	2394		11.8%	2.1%	4.7%	-4.6%	2.2%
59	Schroders	1194		4.9%	3.0%	1.9%	-3.0%	1.9%
60	Meggitt	378		8.1%	2.5%	3.3%	-3.9%	1.8%
61	Reckitt Benckiser	3433		2.4%	3.3%	1.0%	-2.5%	1.8%
62	Whitbread	1821		8.1%	2.4%	3.2%	-4.0%	1.7%
63	Johnson Matthey	2141		12.3%	1.9%	4.9%	-5.2%	1.7%
64	Petrofac	1577		12.0%	1.9%	4.8%	-5.3%	1.3%
65	ABF	1180		10.2%	2.0%	4.1%	-5.0%	1.0%
66	Burberry	1372		15.0%	1.4%	6.0%	-6.5%	0.9%
67	Bunzl	1006		6.5%	2.4%	2.6%	-4.1%	0.8%
68	Intercont Hotels	1412		7.3%	2.2%	2.9%	-4.5%	0.6%
69	Rio Tinto	2795		6.6%	2.3%	2.6%	-4.3%	0.6%
70	Wier Group	1552		11.0%	1.7%	4.4%	-5.6%	0.5%
71	Experian	903		9.0%	2.0%	3.6%	-5.0%	0.5%
72	Croda	2180		9.9%	1.7%	4.0%	-5.7%	0.0%
73	Intertek Group	2564		15.0%	1.1%	6.0%	-7.6%	-0.5%
74	Xstrata	913		8.1%	1.7%	3.2%	-5.7%	-0.8%
75	International Power	414		1.3%	2.4%	0.5%	-4.0%	-1.0%
76	Antofagasta	1017		15.0%	1.0%	6.0%	-8.4%	-1.5%
77	Serco	524		9.1%	1.4%	3.6%	-6.6%	-1.6%
78	Smith & Nephew	606		3.7%	1.7%	1.5%	-5.8%	-2.7%
79	Aggreko	2157		13.9%	0.8%	5.6%	-9.1%	-2.8%
80	BG Group	1266		7.5%	1.1%	3.0%	-7.8%	-3.7%
81	ARM	492		15.0%	0.6%	6.0%	-10.5%	-3.9%
82	Tullow	1395		15.0%	0.4%	6.0%	-12.7%	-6.3%
83	Randgold	5130		15.0%	0.3%	6.0%	-13.3%	-6.9%
84	Shire	1897		10.7%	0.4%	4.3%	-11.8%	-7.1%

There's the data. No real surprises. A lot of insurance companies at the top of the list with their high yields and growth forecasts. I'm a bit wary of them though. The adjustment factor is very harsh on stocks what have low dividend yields. As my preference is for investing in high dividend stocks I don't have a problem with it but the model clearly favours dividend stocks opposed to growth 

See also: FTSE100: Individual stocks (Updated)