Hobson: The Trouble With Vodafone

THE WEEK: Morningstar columnist Rodney Hobson regrets not following his instincts and getting rid of his entire Vodafone stake when the firm exited the US

Rodney Hobson 8 March, 2019 | 9:24AM
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Selling half your stake in a company is a tactic I have rather scorned over 30 years of writing about stock market investing. The only excuse is when you need a limited amount of cash. If you’re selling shares, presumably you fear they will fall, so why not sell the lot? If you think it’s still a worthwhile investment, why aren’t you hanging on to the entire holding?

I made the shillyshallying mistake of going half and half when Vodafone (VOD) sold out in the US, potentially its most profitable area. I should have followed, to its logical conclusion, my view that the mobile telephony giant would struggling to carve out a new niche, as has proved to be the case. Vodafone shares have fallen from 252p four years ago to around 135p now but the real dive has come in the past 15 months.

This week there was some respite when Vodafone revealed its financing plan for the €18 billion acquisition of Liberty Global’s cable networks on Germany and Eastern Europe. It is raising €4 billion by issuing bonds that can be converted into shares, which means technically that it has not added to its €32 billion debt pile. The bonds were snapped up within hours.

Now I approve of Vodafone’s plan to build on its presence on Germany, its largest market in one of the world’s strongest economies, even though those debt worries have dragged the shares lower since the deal was announced last year. However, I feel that the 2% bounce in the shares was a triumph of hope over adversity. Avoiding more debt is good for the debt ratings but bad for shareholders who will see their holdings diluted. It’s a mixed blessing.

Despite continuing to hold onto my reduced stake, I have not felt able to recommend Vodafone as a buy for longer than I care to remember. I haven’t changed my mind yet.

Share Price Falls Unjustified

Sometimes it seems that you just can’t please investors. Packaging group RPC (RPC), in which I hold shares, was clobbered for being into plastics; DH Smith (SMDS) saw its shares fall 3.5% when it announced the sale of its plastics business for £450 million, widely acknowledged by analysts as a decent price.

Admittedly that means 6% of profits are removed at a stroke but it also means debt is reduced and Smith’s reputation for producing recyclable packaging is enhanced, so I felt the initial fall was unjustified, especially as it accompanied a positive trading update and came after a 30% slump in the share price since last June.

It’s true that demand for packaging will inevitably be reduced if the global economy slows as forecast but such a fall in Smith shares is way too much. In fact, some canny investors took the chance to get in smartish and Smith shares were 3.7% up by the end of the day. They remain a buy.

Debenhams Investors Have Been Warned

I won’t waste my typing fingers telling obstinate Debenhams (DEB) shareholders that it’s not too late to get out while the shares can still be sold for as much as 2p each but it may be worth warning knife catchers not to even think about taking a punt in the belief it can’t get any worse. It can, in fact it just did. Things are so bad that a trading outlook issued – probably in good faith – little over a month ago is already invalid as being too optimistic.

Debenhams will either be taken private again, in which case don’t expect more than a pittance for the shares, or go bust, in which case expect nothing. Retailing is a jungle, so getting peanuts is hardly surprising.

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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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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