Betting on Vodafone, Bailing on M&S?

Morningstar columnist Rodney Hobson discusses his opinions on Vodafone, M&S and the current political climate

Rodney Hobson 11 January, 2013 | 8:00AM
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Betting on a Bid

Buying shares in the hope of a takeover bid is not investing – it is gambling. Good luck to you if you find that you are brilliant at spotting potential targets and pocketing the occasional quick profit, but I suspect that most punters would find themselves locked into a drawn-out and uncertain waiting game.

It is no surprise, therefore, that the market is singularly unmoved by talk that Vodafone's (VOD) US partner Verizon Communications (VZ) might make a bid. I think it is highly unlikely. Certainly the odds do not favour a punt.

Vodafone is the largest holding in my portfolio and I bought the shares for their high yield. In particular, I bought most of my holding before Verizon Wireless, the joint venture, started paying a dividend because I believed, rightly as it turned out, that a substantial flow of cash from the US would start soon.

Any change in the lucrative arrangement is a negative for Vodafone shareholders

Any change in the lucrative arrangement is a negative for Vodafone shareholders. A bid for the whole of Vodafone, or an offer to buy out its 45% stake in Verizon Wireless, would provide a one-off bonanza but offer little for the future. In any case, a full bid would not necessarily be entirely in cash while some of the proceeds of a buyout of the joint venture would be retained to buy some other business that might not perform so well. There are too many imponderables for me.

On the brighter side, neither Vodafone nor Verizon Communications seems to be under any great pressure to do anything at this stage. Why mess with an arrangement that works well for both sides? So I shall retain my Vodafone holding but will not be adding to it as I am committed far enough. However, the shares are still underrated in my view and anyone buying in now – for the right reasons – will not regret it.

Like for Unlike

Speaking purely as an investor rather than a shopper, I am not a great fan of Marks & Spencer (MKS), which is struggling alongside most of the High Street as consumers try to make ends meet. However, I think we need to put events of this week into perspective.

The leaking of like-for-like trading figures for the 13 weeks to December 29 was unfortunate but not disastrous

The leaking of like-for-like trading figures for the 13 weeks to December 29 was unfortunate but not disastrous, coming as it did outside stock market trading hours. M&S rightly alleviated the damage by releasing its trading update as quickly as possible. I think this embarrassing episode will soon be forgotten.

More importantly, the figures themselves are poor but not disastrous in the current conditions. They do demonstrate that while M&S continues to get food right, supplying better quality at a slightly higher price, it remains singularly unable to repeat the trick in clothing and household goods.

Where I feel that M&S is not doing as badly as it looks is in like-for-like sales. These will continue to understate the overall performance while the chain builds its online presence, which has a long way to go and which will take sales away from traditional stores.

It is time to go by the total sales figures, up a measly 0.3% but at least positive, not the like-for-likes, where sales declined by 1.8%. M&S has a big enough mountain to climb without making it worse than it is.

Better Late Than Never

The dreaded norovirus prevented me from commenting on the American Budget deal as intended last week, but it is not too late to revisit the thorny issue. Better late than never, which is more than you can say for the deal itself.

The whole point of the fiscal cliff was that the president and Congress had more than adequate time to agree on tax measures and public spending with a fail-safe clause comprising a deadline to concentrate minds. Alas, both belt and braces let down the political trousers and a deal was not agreed until after New Year had been rung in.

Even worse, the deal is no more than a temporary fudge, and the risk is that the political stalemate will last for at least another two years and possibly four. The November election, which I had believed would break the logjam one way or another, achieved nothing.

It is possible to take the view that if politicians are forced into inertia then the rest of the country can get on with running the economy and it may prove to be the case that the fudge will hold simply because no-one is able to do anything about it. The logjam, far from holding up the economy, would thus produce calmer waters.

I think that this hypothetical scenario is possible but highly optimistic. Investors need to be on guard at the start of this year as they were at the end of last year. Any shocks will bring a drastic, though temporary, slump in share prices of the sort we have seen since the credit crunch.

I have decided to stand back from any further investing at this point after seeing the FTSE 100 index top 6,100 points. It’s a great start to the year for those who, like me, concentrate mainly or wholly on the UK stock market, but I am not convinced that the time is yet ripe for a solid upward thrust.

We could well have done without the United States postponing the evil day of facing up to its fiscal problems, given that the European Union is in no position to sort out its own mess. That’s another crisis that will keep popping up throughout the year without ever being settled.

There is a rather mournful Christmas song called Have Yourself a Merry Little Christmas. It contains the line: ‘Until then, we’ll have to muddle through somehow’. Some day we will see the investment climate back to normal. Until then, continue to muddle through. 

Market Performance: January 7 - 11

FTSE 100 Index: +0.52%
FTSE 250 Index: +0.81%
FTSE All Share: +0.58%
FTSE Small Cap: +1.33%
FTSE AIM 100: +2.72%
FTSE Fledgling: +2.30%

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Marks & Spencer Group PLC309.60 GBX2.01Rating
Verizon Communications Inc41.43 USD0.31Rating
Vodafone Group PLC70.52 GBX-0.98Rating

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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