“Rule number one: never lose money. Rule number two: never forget rule number one.” Warren Buffett
I hope you have been able to see the progress that can be made in a short period of time because you can make the same progress if you follow the lessons of this book. When I started to dedicate myself to getting better I tried to learn and implement as many new things as possible into every article as you probably noticed in the huge chapter on Altria. After doing this for a while and getting a bit overwhelmed I decided it would probably be better just concentrating on adding or learning one new thing for each article written I found that this was a much better way for me to do things as I improved much faster than when trying to learn many new things at once. Going by this process I also noticed that my analysis was still concentrated, I was improving more, and the actual analysis articles got much better because I understood what I was doing better than when trying to learn multiple things at once.
The exact process of becoming a better investor is tough and when you first start, you will probably be doing a lot of things and concentrating in areas that you later will have no interest in. Treat every company you research as a potential learning experience, try new things, and continue to constantly push for improvement. Your investing journey will change drastically over time and it is a good thing if it does because it means you are pushing yourself to keep learning and improving.
As an example of how far you can come using the principles and techniques outlined in this book I want to show you how much I was able to improve in just one year once I dedicated myself to becoming an excellent value investor. The following is my first ever stock “analysis” write up. The information is completely unedited other than change of the font, size of font, some of the formatting, and a few typos.
Vodafone Group PLC, ADR, (VOD) info
All information taken from Morningstar.com, Vodafone’s website, fool.com, or Vodafone’s most recent annual financial report.
With 343 million proportional customers (total customers multiplied by its ownership interest), including its 45% stake in Verizon Wireless, Vodafone is the second-largest wireless phone company in the world behind China Mobile. It is also the largest carrier in terms of the number of countries served. Vodafone has majority or joint control in 22 countries and minority or partnership interests in more than 150 total countries. The firm’s objective is to be the communications leader across a connected world. They have four major markets that they break their financials into: Europe, Africa Middle East and Asia Pacific or AMAP, India, and the United States through a partnership with Verizon.
- Huge company operating in more than 150 countries making them more diversified and able to withstand drops in revenues and profits coming from a single region or country.
- Generates huge free cash flows of at least $8.25 Billion in each of the last 8 financial years. Free cash flow or FCF is basically the money that’s left over after expenses, dividends, payments, etc that the Vodafone can use as it pleases. Generally VOD uses their FCF to increase their dividends, buyback their own stock, acquire other companies, or pay down debt.
- Current dividend yield of 6.97%, the average company in the S&P 500 has a yield of around 2%. Pays a semiannual dividend in June and November of each year. Also receiving a special dividend from Verizon, $1 billion of which will go to paying down Vodafone debt, $3.5 Billion will go to pay a special dividend to Vodafone shareholders in January or February of 2012.
- FCF/Sales ratio over 16% each year since the 2002 financial year. Anything over 5% means they are generating huge amounts of cash.
- Interest coverage ratio of 23.4, anything over 1.5 is good. Interest coverage ratio is how many times they can cover the payments of interest on their debt.
- Payout ratio of around 50% for the dividend meaning the dividend should be safe for the foreseeable future.
- Raising their dividend an average of 7% per year for the next 3 years.
- Lower debt/equity than their industry competitors.
- Growing a lot in Asia, Middle East, India, and parts of Africa. Also still a lot of room to grow in those areas as they are relatively new to them, especially India.
- Paying down debt with FCF.
- Gross margin, net margin, and EBT margin all over 17% which is very good.
- Still a lot of room to grow their revenue through people upgrading to smart phones and paying for data packages which they make more money off of then regular phones.
- Executive pay is linked to how well the company does, and they encourage their executives and directors to own company stock.
1. Still a lot of debt even though they are paying it down, around $40 Billion
2. Most of Western Europe except Germany is having huge economic problems which have led to lower sales and profits in those areas.
3. The fear or actuality of another global recession would hurt their sales and profits.
4. Problems at Verizon which VOD owns 45% of would hurt future payments from Verizon to VOD.
5. Most of their revenue is generated in Europe where as above, there are big financial problems.
6. Since they are in so many countries they have to deal with many regulations and sometimes even lawsuits from other governments or companies in those countries.
Overall I feel very good about Vodafone’s prospects to be a great investment for the long-term. We are buying them when they are valued at a very good price, especially compared to their competitors. They have huge growth potential in India, a country that has over 1.3 billion people, as they have only penetrated that market by around 10%. They are paying down debt, upping their dividends and receiving a special dividend from Verizon. Even if their share price doesn’t go up over the next few years, which I believe it will by quite a bit, then we are still covered by the near 7% dividend that they are going to keep growing at least 7% a year for the next 3 years. Also, with their huge FCF they can maybe pay down debt faster, acquire other companies to keep growing, pay more dividends, or buyback their stock.
As always if there are any questions let me know. I believe we will all do well with this stock in our portfolios over the long-term.
Go back and compare this to any of the chapters in the book and the difference is shocking. Shocking in how inadequate my thinking still was at this point where I was investing real money as most of the above you can tell was taken directly from financial sites and the companies own website, not exactly in-depth independent analysis on my part. The reason I put my first ever write-up in this book is to illustrate how much better you can get in a very short time frame by using the principles and techniques outlined in this book and dedicating yourself to constantly improving.
If you do love value investing, have followed what has been shown to you in this book, have read from some of the sources that I have talked about and listed on my blog, and have the drive to continually improve yourself and get better, I guarantee that you will now be better at evaluating whether a company is a potentially fantastic investment better than most MBA’s and professional level investors without having to spend tens or hundreds of thousands of dollars at a big time university and saving years of time having to research all of this information for yourself.
Thank you so much for buying this book, good luck, and continue to work constantly at getting better and improving your processes.
I shared my first ever “analysis write up” last year during my year-end performance review and wanted to share it again to illustrate how far you can come by truly dedicating yourself to the value investing craft and continually learning and improving in a short amount of time. With the things I teach in the book I hope the process will become even faster for you if you choose to go down this road.
Next week I will release the 2013 year-end review for my personal portfolio and the portfolios I manage. The results were shocking to me since I only do a full performance review usually once a year.
If you have enjoyed this and other portions of the book I have released thus far please visit this page to buy the book and to see the now four reviews, all of which are 5 stars, that the book has received thus far.
If you would like to read other excerpts from How To Value Invest that I have released please view this page.