Why I Would Buy Vodafone Group plc And BT Group plc But Sell BG Group plc

Royston Wild runs the rule over FTSE 100 giants Vodafone Group plc (LON: VOD), BT Group plc (LON: BT.A) and BG Group (LON: BG) plc.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I am analysing the investment case for three of the London Stock Exchange’s biggest stocks.

Vodafone Group

At first glance, telecoms leviathan Vodafone (LSE: VOD) (NASDAQ: VOD.US) may not appear particularly attractive value for money. The business has long been rocked by the impact of tough competition and regulatory issues in its European marketplaces, problems which are anticipated to push earnings 63% lower in the year concluding March 2015.

More recently, however, Vodafone has seen customer demand pick up in these key regions, partly as macroeconomic conditions have improved but also due to the impact of its gargantuan $13bn Project Spring investment programme in boosting its voice and data services. Consequently, the firm is expected to report a much improved 1% loss for fiscal 2016, before bouncing back into the black with a 20% advance in 2017.

These figures leave the company dealing on P/E ratios of 34.7 times prospective earnings for 2016 and 29.5 times for 2017, soaring above the benchmark of 15 times or below which is widely regarded as attractive value for money. But I believe that Vodafone fully merits this premium owing to the quality of its operations, not to mention the surging progress reported in Asian markets and recent entry into the lucrative ‘quad-play’ services sectors in Germany and Spain.

As well, Vodafone’s generous dividend policy also helps to offset these high earnings multiples, with the City expecting total payouts of 11.8p per share in both 2016 and 2017. As a consequence the business carries a market-busting yield of 5.4% through to the close of 2017.

BT Group

Like Vodafone, I believe that BT Group’s (LSE: BT-A) (NYSE: BT.US) huge investment in the multi-services space should support solid profits growth. The firm’s multi-year fibre laying programme, combined with the success of its BT Sport channels, continues to drive its retail customer base higher — indeed, revenues at its Consumer division leapt 7% during September-December, to £1.1bn. And I expect sales to pick up still further following its acquisition of mobile operator EE last year.

BT has a proud record of delivering reliable annual earnings expansion, and the business is expected to follow growth of 6% in the year concluding March 2015 with rises of 3% and 7% in 2016 and 2017 correspondingly. These numbers leave the business changing hands on a P/E ratio of 14.9 times for the outgoing year, and which slips to a lip-smacking 14.3 times for next year and 13.3 times for 2017.

And despite the strain of heavy capital expenditure on the balance sheet, the effect of steady earnings growth is expected to keep the full-year dividend rattling higher throughout this period. Indeed, an estimated 12.8p per share payment for fiscal 2015 is primed to rise to 14.7p in 2016, before marching to 16.6p in 2017. Consequently, the yield leaps from 2.8% for 2015 to 3.3% in 2016 and 3.7% the following year.

BG Group

With the oil price expected to remain under the cosh for some time to come, I believe that BG Group (LSE: BG) remains a stock not for the faint of heart. Although output is expected to spew forth from its Australian and Brazilian assets from this year onwards, the prospect of a prolonged supply/demand imbalance across the crude market looks set to crimp revenue growth.

BG Group saw earnings slide 8% in 2014 as a result of last year’s oil price collapse, and an environment of persistent pressure this year is anticipated to drive the bottom line 65% lower in 2015. As a result the fossil fuel giant changes hands on a ridiculously-high P/E rating of 31.5 times for this year.

And although the City expects BG Group to record a 91% bounceback in 2016 — in turn pushing the earnings multiple to a far-improved 15.3 times — I believe that such a rebound is unlikely given that OPEC has vowed to keep production flowing, and US shale output is expected to remain plentiful, even in spite of a falling rig count.

Similarly I reckon that expectations of chunky dividend hikes this year and next are overly-optimistic. Current forecasts point to a total payment of 19.6p per share in 2015 and 21.2p next year, up from 18p last year and driving the yield to 2.4% and 2.6% for these years. But with last month’s announced capex cuts underlining the stress on the balance sheet, in my opinion predictions of such payment rises could be a hope too far.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

Dividend yields of nearly 10%! I’d buy both these bargain FTSE 100 shares

Our writer highlights a pair of income shares from the flagship FTSE 100 index that each yield nearly 10% and…

Read more »