Should I Sell Vodafone And Buy BT?

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By

David O'Hara

Published in Investing on 6 December 2012

A Fool weighs up one telecoms giant against the other.

Vodafone (LSE: VOD) (NASDAQ: VOD.US) is a blue-chip mobile telecoms titan with a big dividend yield. BT (LSE: BT-A) (NYSE: BT.US) has long been more focused on fixed-line services, but is now providing some exciting new services.

One thing investors don't do often enough is assess investments versus other shares available on the market. If another company has better prospects, shouldn't you consider switching? Instead, we often hold on to the share we have already bought. We are biased toward shares that we already own simply because we already own them. Selling and switching would feel like admitting an error, and no-one likes to do that.

Here, I'm going to compare a share I own (Vodafone) with one that I don't (BT).

Vodafone and BT: head-to-head

CompanyPrice (p)P/E (forecast)Yield (forecast, %)Market cap (£m)
BT2369.54.018,450
Vodafone16210.37.378,710

Data from Stockopedia

As a result of some eurozone write-offs, Vodafone profits are expected to fall this year. The shares currently trade at 10.3 times consensus forecasts for this year and just 8.1 times the figure achieved last year.

Profits at BT are expected to fall by a similar amount. Crucially, BT is trading on the lower P/E. Both shares are expected to return to growth next year. Analysts forecast 1.0% earnings growth at BT and a 4.4% advance at Vodafone.

The Vodafone dividend is a thing of beauty and one of the very largest in the FTSE 100 (UKX). It's no-contest between the two here. Special dividends from Vodafone's joint venture Verizon Wireless have boosted payments to shareholders to a level that BT holders can only dream of.

Vodafone also has a far superior dividend growth records. The per-share payout at Vodafone is 40.8% higher than it was five years ago. At BT, the 2012 dividend was just 55% of the 2007 payout.

Share price movement

Today, BT shares trade at a three-year high. Vodafone, on the other hand, trades within a whisker of a two-year low. Vodafone is clearly the contrarian pick.

With its November interims, Vodafone reported a planned £1.5bn share buyback. This will reduce the number of shares in issue (boosting my stake in the company) and mean the company can pay higher dividends in the future. There could be another side effect: the buying pressure could force shares in the company temporarily higher.

The winner is...

BT offers some growth opportunities via the roll-out of its pay television operations. However, I believe that BT is taking on a significant risk by moving into a market that Sky has long dominated.

Vodafone shares carry the possibility of a significant short-term gain and the prospect of a long-term high yield. I won't be switching at this price.

If you are interested in using high yield shares like Vodafone to boost your portfolio, then check out what top fund manager Neil Woodford has been buying. Mr Woodford is an income investor par excellence. His investment funds have been thrashing the market for years. To help you learn from this maestro, the Motley Fool has prepared a free report “8 Shares Held By Britain's Super Investor”. This details some of Mr Woodford's current favourite shares. Simple click here to start reading today.

> David owns shares in Vodafone but none of the other shares mentioned in this article. The Motley Fool has recommended shares in Vodafone.

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Comments

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duffmanchon 06 Dec 2012 , 5:45pm

me neither!

F958B 06 Dec 2012 , 6:33pm

BT are a pension fund (in deficit) that also happens to operate a few communications systems.
BT's share price is a slave to the FTSE; the main driver of BT is the pension fund and will be for many years.
BT also happen to have very high debts and very low interest cover.

In other words: all the hallmarks of a business which could easily go bust, but which are currently managing to stagger along.

The last time I looked, BT's pension fund was almost three times the value of BT itself (£45-ish Billion fund, £18-ish Billion market value of BT, £20-ish Billion deficit on the pension fund), and therefore a deficit as great as the entire market value of BT.
The deficit is equal to several years worth of BT's entire pretax profits (assuming the deficit doesn't get worse as a result of stockmarket or government bond losses).

The road ahead for BT is long and tough, with not only a heavy debt load but a major financial problem that is significantly out of their control (i.e. BT can't control asset prices underpinning their pension fund).

I only hold Vodafone, despite wanting to "diversify" into another telecom company.

theRealGrinch 06 Dec 2012 , 10:19pm

As said, BT is little more than a cash cow for all those pensioners its supporting dating back to the good old bad days of trade unions and nationalisation.

TimBlx 06 Dec 2012 , 11:11pm

VOD have recently said they will use the Verizon dividend for share buybacks. Wither the yield?

andyalan10 07 Dec 2012 , 12:18am

I'm not sure that anything in the article or comments is new information this year, so I'm left thinking that noone can explain why BT are up 20% since the start of the year and VOD down 10%.

As a holder of both I'm more seriously considering shifting BT -> VOD, not the other way round.

F958B 07 Dec 2012 , 7:36am

andyalan10

re:
"....explain why BT are up 20% since the start of the year and VOD down 10%...."

This year has been a "risk-on" year, with stockmarkets currently nearer the highs than the lows.
Therefore the riskier bets have given higher returns (such as BT and their financial-market-dependent pension).

I think that some market caution over the latest spectrum auctions also weigh on VOD's share price, as does the market disappointment that not all of the VZW dividend will be paid to shareholders. However, VOD does have a US shareholder base taht the management need to consider and those in the US don't view dividends in the same way as UK investors - especially not with current and proposed US tax law changes.

jackdaww 07 Dec 2012 , 9:05am

why compare these two ??

are they not very different business's?

i hold vod but zero BT.

ProfessorMarcus 07 Dec 2012 , 9:51am

Perhaps a good idea to hold both companies? Weighted 70-30 in favour of VOD?

I aim to have 2-3 companies per sector in my HYP. E.g. for supermarkets I hold all 3 of MRW, SBRY and TSCO. It might be easier to hold equal weightingd rather than calculate which company has the better prospects but this will depend on the investor's aims.

IDPickering 07 Dec 2012 , 11:00am

I hold a 50:50 split between these two.

onar99 07 Dec 2012 , 11:03am

I agree,
I have sold half my BT shares last week and bought more VOD.

eccyman 07 Dec 2012 , 12:22pm

Regarding the BT pension fund deficit, it's far smaller than it was and BT are making large payments to eliminate the deficit altogether.

goodlifer 07 Dec 2012 , 12:59pm

Why don't we get transripts any more?

F958B 07 Dec 2012 , 1:43pm

eccyman

Yes, BT are working hard to deal with their "deficit", but the pension funds sheer size, let alone any deficit, will remain a risk for many years.
There was also a change in BT's pension payment laibility from RPI to CPI, but although BT won the first legal dispute over this, unions indicated their intention to appeal and the dispute may subsequently go against them on appeal or re-appeal.

BT are trapped between government bonds (low yield, risk of default/inflation) and equity markets (not much economic growth to drive profits).

Basically BT are almost as risky as an insurance company, since both are heavily dependent on asset markets for their survival and both manage assets and liabilities multiples the size of the company underlying it.

I also find BT's dividend cuts in 2001/2002 and 2009 to be uninspiring.

Vodafone have a better track record and stronger finances.

ANuvver 07 Dec 2012 , 10:49pm

Indeed. Apt comparison with insurance cos. BT is largely an inefficient beleaguered bond fund with its hands tied by markets and regulators, plus enormous management costs before shareholders can see a benefit.

Incidentally, I don't feel the need to mess around with the European bond and currency markets - I let my Aviva position do it for me.

atilliator 08 Dec 2012 , 1:59am

I wouldn't touch either of them. I know too little about Vodafone;s market, and, because of the lousy customer service, I wouldn't touch BT with a 14 foot spear.

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