In a recent blog post surveying the attractiveness of individual FTSE 100 stocks Vodafone came 2nd with an expected annual return of 10.8%. The figure was based on the average 3 year dividend which came in at 5.1%. The current dividend yield is 5.5%, with a 7.5% analyst forecast for 2013. The dividend for 2014 is estimated at 13.79 compared to 9.52 for this year. That gives an almost 45% increase in the dividend over the next two years. Being conservative I put a 6% annual growth rate on the dividend in the model (which is 75% lower than current analyst estimates).
So on paper the figures are pretty impressive. Vodafone is a mobile telecoms giant with over 150m customers worldwide and good exposure to a numbers of developing markets, most notably India and Turkey.
Is it too good to be true?
Scratching under the surface uncovers a few less desirable features.
Last week their CFO sold £1.7m of his Vodafone stock which was a significant stake reducing his total holdings by almost 40%. In February their Regional CEO sold £900k worth of shares reducing his holding by almost 30%. If you go back to August 2011 over £5m worth of stock was sold by the directors. Very little insider buying has happened over this period and none of the amounts have been all that significant. Of course there could be circumstances when a director needs to sell some stock for some personal reason but the scale of the deals and the fact that a large number of the insiders are selling at the same time seriously concerns me especially as the stock looks so attractive on paper.
On the 17th May Vodafone broke it's 100 day support line suggesting a downtrend is imminent.
The weak price action coupled with the serious insider selling would certainly discourage me from investing in this stock. The high analyst estimates also seem a bit too optimistic for me. Sure, Vodafone has exposure to growing emerging markets but this is still a very competitive sector . The dividend is a clear appeal to many investors and is currently covered well but the cover going forward, especially with the generous dividend increases, looks a bit tight. If the directors aren't confident enough in their own business to keep holding the stock then neither am I.