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That should be: For all "I know" near end of final paragraph. - Also a tick-up for FRTEB who made some similar points which I only read in full after my post. - Cheers.
Daniel,
Fair points. They call it "confirmation bias". Common enough across financial markets & especially with L/T holders, some of whom become (understandably perhaps) emotionally defensive of any criticisms of their investments.
FCF is significant, but VOD's FCF was always questioned by a minority about the way it was calculated. This minority was invariably shouted down with claims that the divi was safe because of FCF. However, read any investors manual from proven top investors. High debt that's increasing is always a red alarm bell. Selling key assets to a manage it is another warning. It's serious.
I took my hit at 151 in VOD (at significant loss) to buy more LLOY at 52+ as I think its SP is suppressed largely by ongoing macro-political uncertainties. Those will be finite. Naturally I missed the bottom there, as I missed my exit being better here. So it goes.
I honestly don't know how VOD's SP will do in future. All's we know for sure is that it didn't consolidate above 163 resistance for long enough to break out & has larger resistance at 170 later. For alI know you may be well over 170 early next year after next update. I hope so! But if it drops below 160 on higher volume, that will be telling about the lack of market confidence. - Regards.
The way I look at it:
Free cash flow has to be there to pay dividends year-to-year otherwise where are the cash payments for the dividends coming from -
- Debt (more of - and we all know where that ultimately leads...) or
- Sale(s) of assets (effectively liquidating part of the company to give you your own money back)
FCF is real - not an accounting number. But capital expenditure can take FCF negative. Is that bad? It depends. If the capex is relatively one-off and is going to fund tangible growth then why wouldn't that be a good thing. But if FCF is consistently negative then clearly that doesn't bode well.
However, it's all well and good having FCF to pay dividends but in the long term the company still has to be able to pay dividends from profit (earnings). We all know (or should know by now) that earnings can be manipulated without any material change within the business. Conveniently writing off intangibles and goodwill when it suits (political reasons or new CEO?) is a classic example. Does that make the business more or less viable? It depends. If the write offs are due to massively overpaying to take over another company (lack of due diligence?) it suggests management incompetence. But what if the write offs are due to legacy issues that are now firmly in the past?
IMHO nothing is ever clear-cut. FCF can keep dividends rolling in in the short term but longer term you cannot ignore earnings cover for dividends. If either FCF or earnings go negative then you have to look deeper to try to understand the reason(s) and ask if it's likely to be a one-off or is there a pattern developing. In the case of VOD's earnings cover for the dividend there was clearly a pattern and there was intermittent but growing talk of a dividend cut. Perhaps is was confirmation bias from a few that keep telling people to just look at the FCF cover... In the short term they may have been right, but as earnings kept falling short so did the share price.
You only had to look at a VOD chart to see what was happening. But it's the hardest thing to sit on your hands - waiting for the right time to buy. I've got it spectacularly wrong on occasions and missed out altogether. In VOD's case though I bought my first tranche at 143 and bought again at 130. Happy to hold long term. Now let me tell you about my Carillion loss as a result of believing audited accounts and statements from directors... Never easy is it?
fcf is not nonsense, its the life blood of any company or your household for that matter.
Its the amount left over for dividends, debt reduction and extra cap ex if needed. Vod doesnt include spectrum payments, which are now an annual ongoing and rising payment and imo should be included in some form or another as it is now a reoccurring expense.
Finance expenses are covered before fcf and Mr Read did say they were trying to leverage the debt to its advantage. Remember divis were being paid out when the fcf was much less to having more free cash available didnt cause the divi cut.
Remember I commented on the SP, its better to buy at a lower SP as it ebbs and flows but most buy on good news and a higher SP and then get upset when the company has a bad turn as sell at a loss, when doing the opposite should be the coarse of action .
What happened to the old days when so many on here (still on here) went on about free cash flow could pay big divi's & debt didn't matter & a falling share price didn't matter etc. Come on own up. You got it hopelessly wrong. Free cash flow is nonsense, if it doesn't cover debt, & obviously losses. A point I made many times. I asked on here many times what % rate vod was paying on its debts, but got the answer it doesn't matter. Of course it matters. As the old saying goes, Income £1.01p, spending 99p. bliss. Spending £1.01p. income 99p, misery. Same as % paid on debt 2% , profit made from borrowings 1.9% misery, & vice versa. No offence meant, but some on here may be very clued up on stock market technicals, but haven't got a clue about common sense economics.