On the face of it Vodafone is a large well known business with a decent position in the mobile phone market & has been building up an offering in broadband etc. too. On the back of this it pays a dividend of around 13p per share which at the current share price of 144p means it yields an amazing 9%.

Sounds great, what's not to like? Well quite a bit actually which is why I've not held it for a while now having sold out at prices over 200p between 2014 & 2017. The reasons for this were:

1. I'm more of an income growth investor and Vodafone wasn't really growing the dividend, plus the yield was not as high as it is today, which I take as a danger sign at these levels rather than an attraction.
2. I was moving towards following my own Compound Income Scores & this one did not Score well back then and there were more attractive alternatives.
   

So as the latest Scores are out today I thought I'd revisit this one and let you see why I still don't hold it and I'm not tempted to buy down here.

As I mentioned I think the big yield is more of a danger signal and this can be assessed by looking at the dividend cover by earnings and cashflow and on this measure Vodafone scroes in the bottom quartile i.e. the lowest 25% of the nearly 600 companies that are included in the Scores. To be fair it does have some positive attributes like the value it is offering thanks to the yield and an EBIT/EV yield of nearly 6% which puts it in the top quartile on that measure, as it is for financial security too, so it is not all bad.

Having said that though whatever you might think about mobile phones and telecoms as a business it does not score well in quality terms as they make low returns on all that capital they have to plough into buying mobile licences and investing in towers and fixed networks etc. While the margin they make is OK rather than spectacular as mobile is quite a competitive business these days rather than a licence to print money. So again it scores in the bottom quartile on that measure too. Added to that it has also been seeing downgrades to their earnings forecasts since the summer which are much worse than the average stock so it is also you guessed it bottom quartile on that measure too, in fact it is worse than that it is in the bottom decile or lowest 10%.

Now while the shares do look oversold and offer the high yield I'm still not tempted to buy back into this one given the above puts it on an overall Compound Income Score of 19, where 100 is the best, so once again it is bottom quartile overall despite the value and financial security. If that wasn't enough the other thing I monitor with the Scores, although it is not in the overall score, is the price momentum as winners tend to carry on perfroming and losers tend to carry on underperforming. Hence the investing axiom that you should run your winners and cut your losers. I suspect the risk here is that they will continue to drift and the risk is that at some point they may be forced to cut the dividend, given the cover and on going capital expenditure requirements, which doesn't usually go down well with investors who are mainly in it for the yield.

So there you go a quick example of how you could use the Compound Income Scores to quickly assess a company and see how it compares with hundreds of others and then potentially find more attractive candidates. I hope you might have found this post useful if you do hold Vodafone shares and if you would like to learn more about the Compound income Scores and see how you could see how your stock holdings measure up, then please see the link in the navigation menu on the site or click here if that's easier for you. mind how you go and safe investing.

Here is a quick update on the trades that resulted from the latest monthly screening on the Compound Income Scores Portfolio (CISP) which is based off of the Compound Income Scores. For a reminder this generally tries to pick new holdings from the top Decile & hold positions which at least rank in the top quartile.

Thus the sale candidates which came up as a result of their scores dropping below 75 were: Miton Group (MGR), Ferguson (FERG) and Hays (HAS). Of these Miton Group was the closest call as it had a score of 72 on the back of  a low quality score form their variable margins & low ROCE in recent years plus, somewhat surprisingly some recent downgrades. it had however re-rated since it was bought at the turn of the year and provided a total return of 57.4% for the portfolio, including the annual dividend. As the CISP has two fund managers with the other holding in this sector being Jupiter Fund Management which looks cheaper and scores better than Miton (despite having seen bigger downgrades) so I decided to let Miton be sold, although overall it is probably still OK if you wanted to run with it yourself.

Ferguson's score had also slipped due to downgrades and middling quality and reduced value after a 20%+ rise in the price since it was purchased so that went too. Hays was similar although in this case, although the Score was well below the cut off I was tempted to keep it as the score mostly seemed to have deteriorated on not much news and they have a trading update coming up. But given that and the fact that chart seems to be in the middle I guess that could go either way when they update so again I let this one go through.

The replacement candidates that came up again included Plus500 which I have avoided putting in the fund due to my own reservations to detriment of the fund. If I had allowed it when it first came up it would now be showing a 50%+ gain. I see this week they have delivered another positive profits warning although on this occasion the price has not really responded. So maybe the market has caught up to this one now?

So that aside I did plump to put some Ramsdens Group (RFX) into the fund to replace Miton Group. This brings foreign currency (travel money), jewellery retailing, Pawn broking and a bit of a roll out story to the portfolio and might provide some defensive aspects if things do cut up rough given their exposure to the gold price and more demand for the pawn if the economy should go into reverse. It also looks quite cheap on less than 10x with a 4%+ yield and as a bonus was looking oversold thanks to some badly handled / communicated directors sales last week. I was probably biased in favour of this one though as I bought some myself recently too, but in my defence I note Stockopedia rates it as a Super Stock.

Next in was Qinetiq (QQ.) which describes itself as a leading science and engineering company operating primarily in the defence, security and aerospace markets (click their name & the other two to visit the investor relations websites if you want to learn more about them and research them further). It seems a pretty good quality play with improving fundamentals, although it is not the cheapest stock in the market, but nevertheless it brings something different to the portfolio and Scores well with a CIS of 97 so in it goes. Again I probably have a bias here, but in favour of this one as I bought it myself earlier in the year in the low 200's, although again this is a Super Stock according to Stockopedia.

Finally for a bit more defensive stodge I reluctantly allowed Wynnstay (WYN) to re-enter the portfolio, despite its previous low return appearance. It seems to be recovering from a difficult patch and has seen upgrades after their interim results and Stockopedia have it down as a Super Stock too so who am I to argue. If it can return to its previous highs from last year, then it could at least provide a 20%+ return this time around which might be more exciting, but I wouldn't hold your breathe as this seems like a boring dependable stock, albeit low quality with low stable margins of around 2%, which has been around as a business for 100 years, but sometimes boring is good! I note it is a bit over bought in the short term, so if you are tempted you might get a better entry point if you are patient or not as the case may be. Personally I struggle to get excited about this one with its low margins, but for the record Stockopedia seems to think this one is a Super Stock too - so appropriately given what it does, their Stock Rank system is er... bullish on this one!

Click a chart any chart below to bring up a larger view and you can then scroll right through them.

Another post today as it is Thursday and there always seems to be a flood of announcements on a Thursday. This time full year results from Auto Trader Group (AUTO) another member of the CISP.

The numbers at the headline level seem to be slightly ahead of the consensus forecasts, while good cash flow generation saw their debt decline and the leverage ratio fall to 1.5x EBITDA which is acceptable. Aside from the debt that their previous VC owners landed them with it also means they have a threadbare balance sheet with negative NAV or shareholders funds in recent years. Despite this they have been able to return £148.4m to shareholders via share buy backs of £96.2m and dividends of £52.2m while the dividend this year was raised by 13.5% to 5.9p.

The outlook reads pretty positively highlighting the up selling to their commercial customers and the wide take up of their finance offering although this is tempered by the on going caution on the private listing side of things. Nevertheless they are flagging further rise in turnover and margins (which are already very high) and are confident of hitting their growth targets for the year which seems to suggest another year of double digit growth.

Thus the shares don't seem too fully valued on around 18x for the coming year especially when compared to other on line disrupters like Rightmove & Purplebricks. Indeed we saw Zoopla taken out recently, so I wouldn't be surprised if this one attracted a takeover at some point given their growth, profitability and market position. It still Scores well on the CIS so it remains in the portfolio for now.

Just a quick note to say that the latest Compound Income Scores have been updated again today. Meanwhile as promised here are brief details about the trades that were carried out in the CIS Portfolio which is run using the scores. This month there were three potential sales, although in the end I gave VP Group (VP) the benefit of the doubt as they had issued an in line trading update and final results are due in June.

Consequently Central Asia Metals (CAML) and Portmeirion (PMP) whose scores had deteriorated both left the portfolio having delivered decent returns over about a year in the case of CAML & just three months in the case of PMP. CAML was replaced directly with a similar stock with a higher score - Rio Tinto (RIO) albeit that it is much bigger and more diversified in terms of its operations. While PMP was replaced with Mondi (MNDI) the much larger ,  international packaging group where the portfolio then picked up the final & special dividends which gave an immediate yield of 6.27%, although obviously the price will have adjusted down accordingly on the XD day.

Finally in a bit of portfolio tidying up I also topped up a couple of holdings which had lagged with some of the proceeds of the above sales and from some cash that had accrued from dividends. Thus holdings in Headlam (HEAD) & Ferrexpo (FXPO) were topped up. I know this goes against all the suggestions of running your winners and cutting your losers but in this case FXPO continues to score extremely well and HEAD's score is still quite good at 88 and the CIS portfolio will also pick up the final dividend of 17.25p worth 3.88% which goes xd towards the end of May.

That's all for now but don't forget if you would like to learn more about the Scores and how to gain access to them or learn more about the CIS Portfolio then do explore the navigation links at the top of the site if you are on a PC or in the three lines menu at the top if you are on a mobile or tablet or click the highlighted links in the first paragraph. Good luck with your investing and have a great weekend whatever you are up to.

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