Can BT Group plc And Sky Plc Help Protect Your Portfolio From Market Chaos?

Can BT Group plc (LON: BT.A) and SKY PLC (LON: SKY) protect your portfolio in stormy waters?

| 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.

BT (LSE: BT-A) and SKY (LSE: SKY) are two of the market’s most defensive stocks.

The two companies provide multimedia services to customers, which are usually sold on contracts that last for a year, or more. And with the customer paying a regular monthly fee for BT and Sky’s services, the two multimedia providers have a regular recurring income.

Moreover, as customers sign contracts for an extended period, BT and Sky’s revenues are, to a certain extent, immune from economic trends. 

Cash machines 

With a recurring income from customers, Sky’s cash generation is almost unrivalled.

During the past five years, Sky has generated £8.5bn in cash from operations, and the company invest a huge amount to generate such lofty returns. The company’s capital spending only amounted to £2.6bn over the same period.  

As a result, last year Sky generated 100p per share in free cash flow, which means that currently Sky’s shares trade at a free cash flow yield of around 10%. Free cash flow yield offers investors a better measure of a company’s fundamental performance than the widely used P/E ratio. A ratio of 10% is highly attractive. 

Moreover, Sky has been able to achieve staggering returns for investors over the past five years. Group return on equity (profit earned in comparison to total shareholder equity) was 64% last year and has averaged around 80% since 2010. Shareholder equity has increased at a compound annual rate of 41% since 2010 while book value per share over the period has risen from 32p to 184p, as reported at the end of last year. 

Since 2009, Sky’s shares have outperformed the FTSE 100 by more than 100%. 

These returns should continue for the foreseeable future. Sky has recently reported its highest ever level of organic customer growth, and the recent acquisition of European peers should help the enlarged group improve margins thanks to economies of scale. 

Sky’s shares currently support a dividend yield of 3.5%, and earnings are forecast to expand 15% this year. 

Working for shareholders 

Sky’s cash generation is almost unrivalled. Indeed, unlike Sky, BT is currently forking out around £2.5bn a year to maintain its fixed telecoms network. As a result, BT’s current free cash flow yield is only 7%. 

Still, BT’s management has shown over the past five years that it is working to create value for shareholders. Since the end of 2011, BT’s earnings per share have almost doubled, while revenue has declined by more than 10%. BT has been cutting costs and moving into more lucrative markets to boost margins, cash flow and grow shareholder equity. 

As BT’s earnings have expanded, the company’s shares have charged higher. Over the past five years, including dividends, BT’s shares have returned 29.5% per annum — five times more than the FTSE 100 over the same period. As BT’s expansion powers ahead, these gains should continue. 

BT’s shares currently support a dividend yield of 3.3% and trades at a forward P/E of 14. 

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.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Sky. 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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

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 »