UK Value Investor

The companies in this month’s shortlist are sorted and selected based on their growth, both past and estimated future, as well as their current dividend and earnings yields. They all have steady histories over the past decade and I’d go so far as to describe them as good companies at good prices.

Company	Index	Industry	Rolling PE	Dividend (%)
ASTRAZENECA	FTSE100	PHARMACEUTICALS	7.2	5.4
JD SPORTS FASHION	FTSE250	APPAREL RETAILERS	7.7	2.7
CHEMRING GROUP	FTSE250	DEFENCE	11.6	2.7
BAE SYSTEMS	FTSE100	DEFENCE	7.6	5.8
CLARKSON	SMALLCAP	TRANSPORTATION SERVICES	10.2	4.0
RECKITT BENCKISER	FTSE100	NONDURABLE HOUSEHOLD PRODUCTS	14.4	3.5
BALFOUR BEATTY	FTSE250	HEAVY CONSTRUCTION	8.5	4.4
INTERSERVE	SMALLCAP	BUSINESS SUPPORT SERVICES	7.6	6.0
MITIE GROUP	FTSE250	BUSINESS SUPPORT SERVICES	10.9	3.8
CARILLION	FTSE250	BUSINESS SUPPORT SERVICES	9.0	4.4

Paying too much for a company is never a good idea.  10 years ago Vodafone was a cool tech company that was going to grow to the moon and was worth, at least to investors of the time, about 60 times its adjusted earnings which gave an earnings yield of 1.7%.  Ouch, is all I can say.

Behind the whacky share price is a real business which operates year in year out, doing its thing to the best of management’s ability.  For example, since 2002 Vodafone has doubled revenue, almost doubled operating profit, tripled adjusted earnings per share and increased the dividend six-fold.  Compound growth of adjusted earnings and revenue has been about 10% while returns on equity hovers around 9%.  I estimate return on the last 10 years retained earnings at around 15%.

And the share price?  After falling below 150 pence in 2001 it's been more or less stuck there ever since. 

Back in the real world Vodafone continued as a market leader in an ever growing market and became the owner of the world’s fifth most valuable brand.  

Somebody much smarter than I once said “If the business does well, the stock eventually follows”, it’s just that in Vodafone’s case that ‘eventually’ has taken 10 long years.  But with the current earnings yield over 10% and the dividend yield over 5% it’s highly likely that future growth will cause the share price to follow since a dividend yield of 5, 6 or 7% on a company like Vodafone is going to suck in investors like a black hole (not the most positive metaphor, I know).

The question then is can Vodafone be expected to keep growing over the next few years through whatever outrageous fortune the future may throw at it?

I think that is can.  The market for mobile telecommunications is still growing, mostly in emerging markets.   In mature markets growth is likely to come from data revenue rather than voice as people switch to smart devices like smartphones and iPads.  I see no reason why Vodafone cannot grow as the market grows.

As for outrageous fortune, telecommunications is a defensive industry and generally isn’t too heavily impacted by economic downturns.  In the same vein Vodafone is a global company which may protect it from issues in any one country.  If things get ugly (should that be more ugly?) in the next few years it should provide a relatively safe harbour for any cash I invest. 

Other levers to increase the share price are the progressive dividend policy and the £7 billion of cash allocated to share buybacks.

In the wise words of Warren Buffett:

Vodafone may just fit that bill.  

As at today I would consider buying more shares under 185 pence (disclaimer – I already have), whereas if the price shot up due to some good news then I would consider selling at anything over 250 pence.