Hobson: Happy to Hold for Vodafone

THE WEEK: Morningstar columnist Rodney Hobson will be happier when Vodafone leaves India

Rodney Hobson 17 November, 2017 | 1:45PM
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This has been one of the best weeks that Vodafone (VOD) has had for many a long day, certainly since it sold up in the United States and pinned its hopes on Europe and emerging markets.

Ignore a small decrease in revenue, caused by an accounting technicality in the Netherlands. Look at the leap in data traffic, the rise in operating profit, the edging up of the dividend. Savour the indication that full-year profits will beat expectations.

The one blemish is the continuing battle in India, which has exacted ample revenge for Vodafone’s avoidance of tax when it took over operations there.  It is suffering from a price war caused by the launch of a new venture by one of the country’s richest men.

Vodafone has hopes that a merger with another rival will create a more powerful competitor but I fear that the country will continue to be a poisoned chalice and I will be happier if and when Vodafone gets out. It has already agreed to sell its Indian telecoms masts business.

Mercifully, the European operations are doing really well, with strong performances in Italy and Spain.

The shares jumped over 5% on the interim figures and are now back around the 231p that marks their 12-month high. They should go higher still, though it is worth remembering that they have moved erratically sideways between 180p and 250p over the past four years and will struggle to break that ceiling.

So I’m happy to hold but don’t want to add to my holdings. Good luck to anyone who is more optimistic – it certainly isn’t wrong to buy at this stage.

FirstGroup Faces Another Problem

One much extolled virtue of diversifying is that if one bit of the business hits hard times the rest can compensate. Alas, the converse can be true: there always seems to be a problem somewhere or other.

That is the case at bus and train operator FirstGroup (FGP), where for several years the underlying picture has tended to be generally favourable but some one-off problem derails the results. This time the US operations have been hit to the tune of £6 billion by hurricanes, especially in Puerto Rico.

However, a closer look suggests that last year’s one-off problem, a squeeze on margins in the US bus and coach operations caused in part by a shortage of drivers, has persisted. There is no sign that this situation is easing, and who knows what next year’s hurricane season will bring? This year dollar revenue and profits have been inflated by the translation into weak sterling. That effect may be over, leaving FirstGroup with an extra hill to climb.

It wouldn’t matter so much if the US had not become the major part of the business, or if FirstGroup had not paid so heavily to break into the market.

The shares have lost half their value in the past six months and I see no reason to believe that we have reached the bottom yet. Chief executive Tim O’Toole is quoted as saying that “we should be a dividend-paying stock”. Don’t confuse should be with will be. It’s not too late to get out.

Don't Blame Market Conditions

One encouraging sign for London as a financial centre post-Brexit is that companies still want to list their shares here, so it is always disappointing when a proposed float fails to get off the ground, especially one that attracts publicity. The finger is always pointed at poor and volatile market conditions.

We should not, however, be in any way disheartened by the failure of debt collector Cabot Credit Management to get its offering away. Rather, we should be concerned that managers in charge of investment funds were prepared to take nearly half the shares at an inflated price.

When the stock market is holding up really well, as is the case in London, it’s right to think that the fault lies with the company and not with the markets.

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, nor are they the opinions of Morningstar.

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
FirstGroup PLC154.60 GBX1.11
Vodafone Group PLC72.28 GBX0.89Rating

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.

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