August 3, 2014 in Business

Motley Fool: Vodafone continues to expand, attract attention

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Vodafone in July announced the launch of two 4G smartphones: the Smart 4 power and the Smart 4 turbo.
(Full-size photo)

If you’re looking for dividend income, give European telecommunications company Vodafone (Nasdaq: VOD), which recently yielded more than 5.5 percent, some consideration.

Based in the U.K., the company has operations in Europe, Africa, the Middle East and Asia, and has been entering emerging markets, often via partnerships with local companies. It serves 411 million customers, employs around 90,000 people and operates in nearly 30 countries.

Vodafone recently sold its 45 percent stake in Verizon Wireless to Verizon for a whopping $130 billion, and it’s using that money to expand its presence around the world and to develop wider 4G coverage in Europe and 3G coverage in emerging markets. It’s also buying cable companies so it can offer more customers bundles of services, and has been rewarding shareholders handsomely with dividends.

Vodafone does have some downsides, though. Its significant European operations are facing a sluggish economic environment. Earnings have taken a big hit in much of Europe, although they grew well in regions such as India and Turkey. Europe won’t be sluggish forever, though, and most Europeans still don’t have smartphones. In the meantime, Vodafone’s cash flow is hurting, which could possibly lead to a smaller dividend.

Recently trading at a reasonable valuation, Vodafone can serve patient income-seeking investors well.

Ask the Fool

Q: What makes interest rates rise and fall? – H.S., Tulsa, Oklahoma

A: Interest rates are strongly influenced by inflation and the debt market (notes, bills, bonds, etc.). With inflation rather low in recent years, we’ve been enjoying low interest rates. Even when interest rates rise a bit, they’re still really low, historically speaking. The prime rate topped 20 percent in 1980!

These days, our economy is recovering from our recent recession. If it appears to be growing too briskly, the Federal Reserve, headed by Janet Yellen, may hike short-term interest rates via the “federal funds” rate (the rate a bank can charge another bank for use of its excess money) in order to slow growth and keep inflation in check. The Fed can also change the “discount rate” – the rate paid by a bank to borrow short-term funds from the Fed.

When the economy is sluggish, the Fed often lowers rates to give companies and people an incentive to borrow (and spend) money and thereby spur the economy. In recent years, interest rates have been kept low for that reason.

The prime rate and other interest rates are based primarily on these two interest rates, while mortgage rates are linked to Treasury bill rates. The money markets themselves (basic supply and demand for credit) also exert great influence over interest rates.

My dumbest investment

My dumbest investment was chasing what looked like a strong bull move on I bought in the morning and then, around noon, it quickly sold off below my buy, giving me a loss. It was caught up in that ridiculous Facebook initial public offering (IPO). – C.S., online

The Fool responds: You seem to be engaged in short-term trading, which generally isn’t an effective strategy. A famous study by researchers Brad M. Barber and Terrance Odean found that the most active traders earned an average return significantly lower than those who traded least often. (Their report is titled “Trading Is Hazardous to Your Wealth.”) Facebook debuted on May 18, 2012, and closed near $214 per share that day. It did rise and fall in subsequent days, but long-term investors have been well rewarded. Shares recently traded near $360 per share, 68 percent higher than $214.

Short-term traders are often focused on not-too-meaningful graphs of stock-price moves, instead of fundamental factors such as revenue and earnings growth, debt levels and profit margins. Focus on the long run, and remember that Warren Buffett’s favorite holding period is “forever.”

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