Vodafone Expensive, Imperial Tobacco Cheap?

THE WEEK: Columnist Rodney Hobson says VOD is no longer attractive, while IMT is; and explains why he sees markets rising again in February

Rodney Hobson 1 February, 2013 | 4:47PM
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More Ups and Downs

Like the grand old Duke of York, I take note that when they are up, they are up; and when they are down, they are down.

This has been the best January for 25 years and I believe that there will be a further rise in the main FTSE indices in February as well.

Vodafone’s (VOD) shares have risen in the past couple of weeks or so, making them much less worth buying, while Imperial Tobacco (IMT) fell sharply on lower sales volumes, making them much more attractive to buy.

I am aware that not all readers can tolerate either company as an investment, Vodafone for not paying its share of taxes and Imperial for its product. As it happens, neither company gets any revenue from me but this is an investment column, not a lecture on ethics, which individuals must decide for themselves.

I have remarked on several occasions in the past that Vodafone shares are worth buying every time they dip below 170p so good luck to anyone who had the courage to get in below 160p while they briefly had the chance. It must have taken quite a bit of nerve but should be quite rewarding.

However, the shares are now back above 170p and the buying opportunity has gone for now. While Vodafone is a great dividend payer, which is why I bought shares in the company in the first place and have topped up my holdings in the past on dips, the telecoms outfit does have one or two clouds hanging over it, which is why I would not chase the shares higher.

I am staying in for the time being as the yield is terrific at well over 5% to reflect the risks.

The possible disentangling of Vodafone from the lucrative Verizon stake in the US is for me a serious negative, bringing an admittedly substantial short term gain but only at greater long term loss. Verizon is offsetting the tailing off of revenue from struggling Europe. If Vodafone is bought out by its joint venture partner, it will be left with less attractive assets and nothing to tide it over until Europe gets its act together, which we all know will take years rather than months.

In contrast, Imperial Tobacco had moved well above the point at which I bought but the shares fell heavily this week on a trading update that showed it is also suffering in Europe, and in Russia too. The contrast with Vodafone is that the shares are suddenly worth considering as a buy again.

Although the number of cigarettes sold has fallen, tobacco revenue is actually up by 2% and the main brands are still powering ahead. Tobacco is a tough habit to kick, even when times are hard for consumers.

Imperial shares trade at a discount to those of British American Tobacco (BATS), which in my view is unjustified. Either Imperial is too cheap or BATS too expensive. Since IMT is offering a yield of 4.9% this year, rising above 5% next year, I reckon the shares are too cheap.

Happy New Year

Despite a last day hiccup, this has been the best January for 25 years. One month does not make a summer, and it should be noted that January sees a rise in the stock market more than twice as often as a fall, so it does not necessarily set the tone for the whole year.

None the less, a boost to the value of our shareholdings feels better than a kick in the shins and I believe that there will be a further rise in the main FTSE indices in February as well. I have often remarked that one of the better medium term indicators is whether the market shrugs off bad news or good news.

We have seen a contraction in GDP in the UK reported for the final quarter of 2012, which was admittedly not a big surprise, followed by a contraction in the US, which was a nasty jolt. Neither had more than one day’s negative impact. A contraction in manufacturing in China has been completely ignored.

The markets prefer to believe that the UK is doing no worse than bumping along the bottom and that the US will bounce back now that the fiscal cliff has been avoided, while China was racing ahead so fast that a little slowdown doesn’t matter too much, especially as a stimulated Japan can take up the slack.

The reality is that the UK recession has lasted five years and continues, the US is still deadlocked politically and Japan remains stagnant. For now though, we live in hope. As the old saying goes: Cheer up, it might never happen!

You Could Make It Up

After years of writing about real money I have taken up a late-in-life career as a crime writer. My first book, Dead Money, has been published as an ebook by Endeavour Press and is available on Kindle.

It’s not about the stock market but about a market town businessman. The second book is well on the way but I promise that I won’t neglect my weekly dose of real life investment on Morningstar.

Market Performance: January 28 – February 1

FTSE 100 Index: +1.04%
FTSE 250 Index: +0.98%
FTSE All Share: +0.96%
FTSE Small Cap: +0.01%
FTSE AIM 100: +0.40%
FTSE Fledgling: +1.09%

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Rodney Hobson is a long-term investor commenting on his own 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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About Author

Rodney Hobson

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