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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.
My biggest difficulty, even after a couple of decades of investing, is deciding when to sell — buying is much easier, but selling is hard. Still, I’ve made the Beginners’ Portfolio’s sell decision, and the first one to go is Vodafone (LSE: VOD) (NASDAQ:VOD.US).
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Before I tell you why, here’s how our investment in Vodafone went, sold at a bid price early yesterday afternoon:
| Date | # Shares | Price | Charges | Total | |
|---|---|---|---|---|---|
| Buy | 18 May 2012 | 289 | 168.5p | £12.44 | £499.51 |
| Sell | 9 Dec 2013 | 289 | 233.9p | £10.00 | £665.97 |
| Dividends | £58.35 | ||||
| Total | £724.32 | ||||
| Profit | £224.81 |
We made a capital gain of £166.46, and became eligible for dividends to the tune of £58.35 during the time we held the shares. Our profit of £224.81 gives us a 45% return in just under 19 months, which isn’t bad.
But why sell? It’s a combination of two things:
Valuation
When we added Vodafone to the portfolio, the shares were on a P/E of just over 10 and there were dividend yields of better than 7% being forecast, based on the share price at the time. I thought that was just too cheap.
Fast forward to today, and with voice revenues set to fall we have earnings per share predicted to drop around 28% over the next year or two. That would push the P/E above 20, and we’re not in the bargain basement any more. And a good rule of investment is that if you buy on low valuation, you should sell when that undervaluation is out. Vodafone’s undervaluation of May 2012 is out.
Forecast dividend yields are still pretty reasonable, at better than 4% for the next two full years. But we can be less confident going forward, as Vodafone’s latest commitment is only to try to pay out at least as much as the previous year — it has paved the way for the possibility of no dividend rises should the board think that appropriate.
Complication
Vodafone’s prospects are also becoming a bit complicated for a beginners’ portfolio.
As well as low valuation, the other thing that attracted me to Vodafone was its stake in Verizon Wireless. It seemed pretty clear that the ownership was not to the liking of either party, and I was confident that something was going to happen. (Not that that makes me any kind of guru — just about everybody expected something to happen).
I’ve always been impressed by Vodafone’s management, and I was convinced that whatever they eventually did with the Verizon stake, it would be to the advantage of Vodafone shareholders. And so it came to pass — sooner than I’d expected, and a nice result.
International tangles
That deal, of course, is what drove the outing of the valuation, but it has complicated matters. Shareholders will get Verizon shares when the thing is finalised — there will be some sort of cash option, but the details are uncertain.
And now there’s the rumour of a takeover bid by AT&T. I’m less confident that will happen — in fact, I’d be surprised if it did. But it’s an added complication that we can do without, especially as the shares are not bargain-priced any more.
What next?
Vodafone might merge or might be taken over, and fresh rumours could push the price up further. But we’re investors, not gamblers, so we now have £724.32 in cash to re-invest.
The search is on.
