One of the keys to being a successful long-term investor is portfolio construction. You need to build a portfolio that suits your own needs and risk tolerances, and which will allow you to sit back, watch your money grow, and ride out any market turbulence.
The world’s most successful investors always prioritise portfolio construction and risk management over everything else. One of the most common ways to bring an element of stability into an equity portfolio is to include defensive shares, such as SKY (LSE: SKY) and BT (LSE: BT.A).
Outperforming
Over the years, BT and Sky have proven time and again that investors can rely on them to provide capital growth, and income, even in the most turbulent markets.
For example, over the past ten years Sky’s shares have outperformed the wider FTSE 100 by more than 90% while BT’s shares have outperformed the UK’s leading index by more than 100%.
Including dividends, BT’s shares have returned 9% per annum over the past decade and Sky’s shares have returned 10% per annum. Over the same period, the FTSE 100’s annual return has been closer to 5%, even after including dividends.
A model portfolio backtested over the past decade shows how these two companies could have revolutionised your returns over the years.
If you’d invested £1,000 in BT, Sky and a FTSE 250 tracker ten years ago, today your investment would be worth £9,317 including dividends, a total gain of 210% or 12% per annum. A direct investment in the FTSE 100 would have produced a return of less than half this figure over the same period.
Set to continue?
The fundamental question is: are these returns set to continue? Well, BT and Sky have been able to outperform the market because their business is surrounded by a wide moat, and there are few if any serious competitors to their dominance.
With this being the case, BT and Sky should be able to continue to dominate their respective markets and rack up impressive returns for shareholders.
A quick look at the figures reveals that BT is the cheaper of the two companies. Although, for income seekers, Sky could be the better pick.
Crunching the numbers
BT currently trades at a forward P/E of 15. Earnings per share are expected to fall by 3% this year but rebound 7% during the company’s next fiscal year. BT currently supports a dividend yield of 3%, and analysts expect the company to hike the payout by 5% per annum for the next two years, leaving the company with a dividend yield of 3.3% for 2016/2017.
On a P/E basis, Sky is more expensive than BT. The company currently trades at a forward P/E of 17.2. City analysts expect Sky’s earnings per share to increase 13% during 2016. Sky’s dividend yield stands at 3.3%.
However, by using other multiples to value BT, we get a different result. Using the enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) ratio, which measures cash earnings without accrual accounting and cancels the effects of different capital structures, BT looks to be the cheaper bet.
BT trades at an EV/EBITDA ratio of 7.8 compared to Sky’s 14.
