Thursday, May 16, 2019

Vodafone Cuts Dividends to Shareholders

On Tuesday of this week, British Company Vodafone (VOD) cut its dividend by 40%. Not surprisingly, this dividend cut occurred several months after its Chief Financial Officer had stated that the dividend will not be cut. The dividend is cut due to several factors such as the need for cash to invest in 5G, and to acquire Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania

Vodafone (VOD) had been an international dividend achiever, with an almost 30-year history of annual dividend increases. The last five years saw dividend growth slow down to 2%/year. This was a decrease from the 7% annual growth in the preceding five years.

I own a few shares of Vodafone, because of investments I made in 2013. Because of the low amount of shares I own, it would not be cost effective to sell. If I owned a more material amount of shares however, valued around $1000 or more, I would likely sell and reinvest the proceeds elsewhere. Verizon may be a decent option.

You may enjoy the dividend stock analysis of Vodafone from the time I was considering the investment.

The major reason I invested in Vodafone was because of the value opportunity at play. Vodafone distributed shares of Verizon it had acquired as a result of the sale of its stake in Verizon Wireless to the parent company. What was a value play initially, turned out to be a slightly longer term investment.

I have not been a big fan of telecom companies in general throughout the years. This has somewhat been influenced by the fact that I have spent quite a few years working in the sector. This means that it made little sense to also load up my portfolio with telecom stocks. I have not been very enthusiastic about the sector in general too, but I have had exposure to it through my investment in Verizon (VZ), Vodafone and even AT&T (T) from time to time ( I used to follow an options strategy, which I stopped due to hassle factor, despite consistent profitability). I also view technological changes as a negative for the telecom sector.

However, I had sold most of my Vodafone shares throughout the years, for one reason or another. The main reason is the fact that I consolidated a lot of my retirement plans, and ended up buying funds with the proceeds. I ultimately kept only a small position from a legacy retirement account.
I thought of walking you through my history with this company. I like to discuss and share my mistakes, because I view them as learning opportunities. I believe that embracing mistakes and learning from them is ultimately what separates the people who are able to succeed in long-term investing from those who do not stick with it.

It turns out that I invested $200 in Vodafone on October 7, 2013. I used Sharebuilder – I believe that I paid $1/investment back then, but for some reason the broker states that it was a free trade. I ended up buying 5.70 shares of the telecom giant.

After a dividend reinvestment, I received shares of Verizon, which were spun off from Vodafone, or 1.5227 to be exact. Following this distribution, Vodafone enacted a 6:11 reverse split in its shares. The reverse split reduced the number of Vodafone shares from 5.79 to 3.16. I then kept reinvesting Verizon and Vodafone distributions until 2018. This was the time when Etrade decided to buy the brokerage business of Sharebuilder (now Capital One). As a result, there was a time when dividends were received in cash and fractional shares had to be sold before the transition.

I had 3.88 shares of Vodafone at the time, which meant I ended up selling 0.88 shares at $24.22/share or a total of $21.31. I also received a dividend of $4.56 in August 2018, prior to the remaining 3 shares being sent to Etrade. After February’s dividend I am left with 3.0898 shares, with a grand total value of $49.62 as of 5/15/2019.

I had 1.85 shares of Verizon, which meant I ended up selling 0.85 shares at $51.59/share for a total of 43.85. I also received $1.69 in dividends until the one share of Verizon was transferred out to Etrade. After May’s dividend I am left with 1.02161 shares worth a grand total of $58.04.

Overall, that $200 investment from October 2013 is now worth a whopping $179.07. If Sharebuilder hadn’t moved the assets over to Etrade and I didn’t have to sell fractional shares or receive dividends in cash, I would assume I would have still had a small loss on this investment. The largest point is that from an opportunity cost of view, I missed out on gain in some of the US Dividend Champions or Aristocrats over these five years. I did learn (or reiterate in a way) a few lessons on my portfolio building and strategy process.

Some random reader might laugh at these comically low dollar amounts I am discussing here. It makes it seem like my portfolio is an amateurish endeavor. Yet, they would be missing the forest for the trees with this comment. I am discussing low dollar amounts, because I ended up owning only a small amount in the company relative to total portfolio size. I bought a stock where I was ultimately wrong. I minimized the impact of the error by having a very small amount invested in the future dividend cutter Vodafone. When I build a position, I scale in slowly. If the story changes, or I lose confidence in management or there are better opportunities, I divert my capital elsewhere. This is how I end up with a lot of small holdings, which is a great way to monitor investments.

I think that the lesson for me is to invest small amounts regularly in a collection of dividend paying stocks, which meet my criteria. This way, I am able to diversify my exposure and not be exposed to the fortunes or lack thereof of a single company. In addition, by investing regularly, I am building my position slowly and over time. As a result, I am able to view negative changes and deteriorating conditions as I go through my leisurely accumulation of the position. As I view these conditions, and I see that the stock no longer meets my entry criteria, I stop accumulating. This is why I have so many small positions scattered around – they looked good at a time, but due to changes in the environment, I stopped adding to them. Therefore, I limited that amount of capital at risk. I rarely sell, which is a good thing, because on the flip side, I never know which of my investments will be my best one.

On the other hand, building positions slowly also exposes me to the risk that I identify a great company, but by the time I am able to accumulate the target position amount the stock price is too overvalued. As a result, I am stuck with a small position relative to what I would want it to be.

I also tend to accumulate dividends in cash, and pool them together with new cash deposited into my brokerage account, in order to make investments in the best values at the moment. This further helps me to diversify investments per sector, geography and over time. If I had simply let dividends accumulate in cash from Vodafone and Verizon, I would have been left with 3.10 Vodafone shares worth $49.80 and 1.50 shares of Verizon worth $85.20. I would have received $27.07 in cash dividends from Vodafone and $17.20 in cash dividends from Verizon for a total of $179.30. This is very close to what my investments ended being worth after all as well. But in reality, the change is that these funds would have been invested elsewhere and hopefully compounded at a better rate that Vodafone.

So to summarize:

• Keep investing mistakes small
• Spread risk by diversifying in many companies and over time
• Stop investing when story changes
• Keep Spin-offs
• Use dividends elsewhere by reinvesting them selectively in best values of the moment
• Review investing mistakes regularly, in order to learn from them and become a better investor

Relevant Articles:

Should I invest in AT&T and Verizon for high dividend income?
Are these high yield dividends sustainable?
Maintaining Moats in times of Technological Changes
Nine Dividend Paying Stocks I Accumulated in the Past Month

Popular Posts