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Don’t Make These 3 Mistakes With Vodafone Group plc, J Sainsbury plc And Schroders plc

Here are three important things to be aware of, if you’re looking at investing in Vodafone (LSE: VOD) (NASDAQ: VOD.US), J Sainsbury (LSE: SBRY) or Schroders (LSE: SDR).

Schroders

Asset manager Schroders is one of the less familiar FTSE 100 companies. However, perhaps Schroder’s forecast-beating results last week caught your eye, and you decided to have a little look at the company at the weekend.

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You’d have found that Schroders’ shares closed on Friday at 3,151p, that the P/E was 18.9 and the dividend yield was 2.5%. You may have decided that the shares looked a bit pricey.

However, Schroders also has another class of shares (with the ticker SDRC), which are identical, except for carrying no voting rights. For this reason — and a number of other technical reasons — the non-voting shares trade at a discount to the voting shares.

The non-voting shares closed on Friday at 2,425p, giving a much more palatable P/E of 14.5 and a dividend yield of 3.2%.

Sainsbury

Sainsbury’s shares have long been attractive to income seekers, and, at Friday’s closing price of 276.6p, the trailing yield was 6.3%. However, the company warned in November:

“We will fix our dividend cover at 2.0 times our underlying earnings for 2014/15 and the next three years. Our dividend for the full year is likely to be lower than last year, given our expected profitability.

Analysts are predicting the dividend will be 27% lower, bringing the yield down to 4.6%. But that’s not all, a further 13% haircut is forecast for next year, reducing the yield to 4%.

So, don’t be deceived by Sainsbury’s trailing yield of 6.3%. In fact, a company such as Schroders — on a trailing yield of 3.2%, but expected to grow its dividend strongly — yields just about the same 4% as Sainsbury’s on dividend forecasts for 2016!

Vodafone

Vodafone raised $130bn last year by selling its stake in US firm Verizon Wireless. Even after returning $85bn to shareholders, Vodafone retained what is widely referred to as a substantial “war chest” for investment and acquisitions. You might assume Vodafone is awash with cash.

As the table below shows, this isn’t exactly the case.

  30 Sep 2013 31 Mar 2014 30 Sep 2014
Borrowings (£bn) 34.0 29.2 32.7
Cash (£bn) 5.6 10.1 5.9

Between 30 September 2013 (before the Verizon sale) and 31 March 2014 (after the Verizon sale), Vodafone paid down only a relatively small amount of debt. By 30 September 2014, as you can see, borrowings and cash were pretty much back to pre-Verizon sale levels.

Of course, Vodafone has increased its organic investment and made one or two mid-sized acquisitions. But, essentially, its “war chest” now for further asset purchases, additional investment capex and paying £3bn of dividends a year, is not a massive cash pile but an ability to crank up borrowings to an even higher level — at least until such times as acquisitions and growth capex start to produce substantial free cash flow.

In short, Vodafone doesn’t have the big cash safety net that some investors might assume.

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