Head To Head: Vodafone vs BT

Published in Investing on 30 August 2012

Which telecoms giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are telecoms giants Vodafone Group (LSE: VOD) and BT Group (LSE: BT-A).

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including the utility-like telecoms groups.

The shares of Vodafone and BT have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 2%, but Vodafone is up 9% and BT has risen 2%.

Let's take our seats at ringside.

Round 1: earnings

 VodafoneBT
Recent share price184p220p
Last year price-to-earnings (P/E) ratio12.39.3
Current year forecast P/E11.58.8
Four-year average earnings per share (eps) growth (%)62
Current year forecast eps growth (%)85
Forecast operating margin (%)2314

Source: Digital Look. Winners in bold.

Vodafone takes the first round by a narrow margin, winning points on eps growth and operating margin, while BT wins points for its 'value' P/E rating.

It's worth noting that BT's historic eps growth is dragged down by a terrible performance in 2008-09 when earnings fell by 33%. In the three years since, the company has delivered are far more respectable 11% average annual growth -- which is ahead of Vodafone's.

Round 2: dividends

 VodafoneBT
Last year dividend yield (%)5.23.8
Current year forecast dividend yield (%)5.54.3
Four-year average dividend growth (%)6-8
Current year forecast dividend growth (%)714
Forecast dividend cover1.62.6

Source: Digital Look. Winners in bold.

Again, Vodafone comes out on top in a closely fought round. Vodafone's dividend yield is particularly strong and the true income return for shareholders is understated in the table. The company paid a special dividend last year as a result of its 45% stake in US firm Verizon Wireless (NYSE: VZ.US). Analysts are expecting another special this year, which will push the yield up to 7%.

BT's historic dividend growth suffers like its earnings growth from that awful performance in 2008-09. Again, like the earnings, the dividend performance has been much better in the three years since. BT has delivered average annual growth of 9% -- once more, ahead of Vodafone's.

Round 3: balance sheet

 VodafoneBT
Price/Book (P/B)1.213.2
Net gearing (%)36783

Source: Digital Look. Winners in bold.

Vodafone hammers BT in the final round, resulting in a three rounds to nil win and a score of eight points to BT's four.

Post-match assessment

On the face of it, this was a comfortable win for Vodafone. A superb yield, earnings and dividend growth respectably ahead of inflation, and a good operating margin and balance sheet strength, are the hallmarks of a strong, mature company.

But let's not be too quick to write off BT entirely. If you forgave the company its wayward 2008-09 performance and judged it on the three years since, it would score rather more highly.

While Vodafone's high yield is a big draw for income seekers, BT's yield isn't bad and the dividend is well covered. Furthermore, BT's 'recovery' potential could interest investors looking for the added bonus of a re-rating of the shares from their current low P/E if the company continues its recent progress.

Are Vodafone or BT among the shares favoured by top City investor Neil Woodford, the man whose funds have outperformed the market by more than 300% over the past 15 years?

Discover the answer to that question – and a whole lot more about Woodford's enormously successful investing strategy – in an exclusive Motley Fool report, "8 Shares Held By Britain's Super Investor". The report is free to download right now, simply by clicking here.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" – our guide to three favourable industries. This free report will be dispatched immediately to your inbox.

> G A Chester owns does not own shares in any of the companies mentioned in this article.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

snoekie 30 Aug 2012 , 4:39pm

Actually, on my portfolio, Vodafone is the loser (not looser as some poster would have us believe) big time, now just 1.5% up on the original purchase in 2000, price £2.43, even with additions at much lower prices and the part redemption imposed by the company in 06, reducing the size of the holding, as opposed to the price for BT in 02, now making a near 20% profit with additions in 03 and various times in 08 with huge swings in the price from the beginning of 08 to the end of that year.

Admittedly currently Vodafone pays the better dividend, by a material margin, Vodafone paying about 87% of the BT dividend for nearly double the BT shares.

ANuvver 30 Aug 2012 , 6:20pm

What was the reason for BT's '08-09 clunker? An enquiring Fool wants to know.

M0byDick 30 Aug 2012 , 6:42pm

@ANuvver - BT Global Services division made an operating loss of £2bn! The business was subsequently turned around becoming cash positive a year ahead of expectations.
Foolish best
MobyDick (G A Chester - article author)

ANuvver 30 Aug 2012 , 6:49pm

Thanks, um, Moby. But why did it happen?

F958B 30 Aug 2012 , 9:17pm

ANuvver

BT have a history of high debt, low interest cover, unprofitable ventures, an early-2000's rights issue, an early-2000's dividend cut, and a pension fund which has liabilities between two and three times the market value of all of BT's shares.
The last time I looked, the pension fund deficit itself was about a third of BT's market capitalisation; several £Billion in the red.

I've often described BT as a pension fund which also happens to operate a few telecoms businesses.

When the stockmarkets are bad, BT's pension fund has more influence on the business than the operating of their communications networks.
Given the low level of interest cover for their debt, the company could easily find itself in trouble if they had to patch-up a worsening pension deficit due to weak stockmarkets.

Things perked-up for BT about a year ago, when they successfully defeated legal challenges to them moving the index-linking of the pension to (lower) CPI from the previous (higher) RPI.
Unions stated an intention to appeal, but the chance of success look small.
The successful change from RPI to CPI linking of the pension cut several £Billions from their "unfunded future liabilities", strengthening BT's precarious financial position.

BT itself is a typical utility and basically quite a good business, but badly managed. The pst and present managers have tended to be over-ambitious without having the skill, have tended to allow high levels of debt to accumulate (notice that Vodafone did many acquisitions with equity and not debt in the tech mania), and BT's pension fund's sheer size - let alone its deficit - pose a threat to the business.

ANuvver 30 Aug 2012 , 9:49pm

F:

Thanks. You're a star and I found that very informative.

The old saw of "don't buy into a lawsuit" comes to mind. Rejig it and you get "don't buy into a pension overhang". Unless you fancy your chances, of course.

My previous involvement with BT amounts to:

1) My father got everyone who could sign their name together to stag it on launch. One day - in, then out.

2) Temped extensively for them during the 80s when they were hell-bent on ISO9000ing their way into some scenario I never truly understood.

duffmanchon 01 Sep 2012 , 11:30am

On a purely qualitative level I would rather buy VOD as they have international earnings and bt is stuck in depression Britain selling a 20th century technology. The future is surely much brighter at VOD...

jackdaww 01 Sep 2012 , 5:48pm

would be nice to have an article devoted to pros and cons of vodafone.

or comments.

i rarely see any negatives on it - there must be some.

brentford66 03 Sep 2012 , 1:22pm


I put some of my wife's savings in Vodafone. The nice divis keep her quiet - what more could a man want.

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