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Should I Buy British Sky Broadcasting Group Plc?

I’m out shopping for shares again. Should I add British Sky Broadcasting Group (LSE: BSY) (NASDAQOTH:BSYBY.US) to my wish list?

BSkyB is the limit

Last time I tuned into British Sky Broadcasting Group, almost one year ago, I named it a Premier League investment. It had clung onto existing subscribers and added new ones despite the downturn, maximised its cross-selling operation, and survived all the political flak fired at Rupert Murdoch and News Corp, which holds a 39% stake. It was also rewarding shareholders with a £500m share buyback operation, and regularly upping dividends. I called it a buy.

It has put in a solid showing since, rising 16% in the last 12 months, against 11% for the FTSE 100. July’s full-year results were respectable, with revenue up 7% to £7.23bn and operating profit up 9% to £1.33bn. The board hiked the full-year dividend 18% to 30p and said it was seeking approval for another £500m of share repurchases. What’s not to like?

BT or BSkyB? That is the question

Two things, actually. BT, which is making a high-profile assault on its Premier League cash, and Netflix, which is challenging its movie channels. These two are more convincing competitors than the string of wannabees BSkyB has brushed off like so many flies in recent years. It also faces flat advertising revenues and rising costs. Suddenly, the champion looks vulnerable. Is it Manchester United in disguise?

BSkyB still has plenty of firepower. Its average customer pays £577 a year, up £29 in the last 12 months despite the squeeze on wage growth. It boasts a large customer base, with more than 10 million pay TV subscribers and nearly five million broadband customers, giving it the critical mass you need to survive in this market. And it has seen an “explosion” in on-demand and mobile viewing, as more viewers watch TV on their smartphones or tablets.

Channel hopping

Investec has just downgraded BSkyB from ‘hold’ to ‘reduce’, seeing modest downside to current prices, as costs and competition rise. I’m happy enough with its 3.5% yield and progressive dividend policy, but trading at 14.8 times earnings, it could be cheaper. After four years of double-digit earnings per share growth, BSkyB faces a 2% drop in the year to June 2014. I think I’ll try another channel.

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> Harvey doesn't own shares in any company mentioned in this article. The Motley Fool has recommended shares in British Sky Broadcasting Group.