Are BT Group Plc & Sky Plc Shares Good Value?

After this year’s gains, do BT Group Plc (LON: BT.A) & Sky Plc (LON: SKY) shares still offer good value?

| 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.

After a year to forget in 2014, which was more or less the case for UK equities in general, BT (LSE: BT-A) and Sky (LSE: SKY) shares have sprung back to post double-digit gains so far in 2015.

While those who have hung in there for the duration at either company will probably be glad to have done so, I write today with both existing and ‘still on the fence’ investors in mind.

This is because, after gains of almost 25% during the year to date for both sets of shares, the fortunes of investors at each company could now be about to diverge.

Most notably, BT’s efforts at diversification and expansion could continue to pay off over the medium term; however, this may come at the expense of Sky, Vodafone and TalkTalk shareholders.


Late October saw BT achieve the almost insurmountable. It received the provisional go-ahead from regulators for its proposed takeover of the UK’s largest mobile network, EE, which prompted an inevitable wave of condemnation from competitors and yet more lobbying for the divestment of OpenReach from BT.  

While pay-tv is worth close to £10 billion to Sky annually and the combined mobile market significantly more to the industry incumbents, if successful then BT’s move deeper into mobile and pay-tv could now see it become a sector leader across the communications and entertainment space.

However, this will probably come at the expense of companies like Sky and Vodafone, who are now likely to suffer from margin compression as competition in their respective sectors heats up.

Valuations are still undemanding…

Perhaps the very last thing that ‘on the fence’ investors would expect after this year’s gains is for either of the shares to still trade at a level where valuations are undemanding. But this is still very much the case.

From a price to earnings perspective, BT shares currently trade at 15x the consensus estimate for earnings per share (EPS) in 2016 and 14x the estimate for EPS in 2017.

This implies a notable discount to the 21x average of the UK telecoms sector, and the 16x average for the European telecoms space as a whole.

Sky trades at 16.2x the consensus for EPS in the current year, which represents a discount to the average for UK telecoms and is broadly in line with the European average. However, lower estimates for subsequent periods mean that the current valuation rises automatically further down the line.

Dividend growth…

In addition to a reasonable valuation, the dividend outlook at BT also remains attractive. Current consensus estimates suggest that both earnings and the dividend will continue to grow in the low double digits for the foreseeable future, with dividend cover remaining above 2x the payout.

This level of cover compares well against the UK average of 1.4x and the 1.0x cover for BT’s European counterparts.

Such a surplus relative to peers also suggests to me that, even if growth were to stagnate, the outlook for cash returns to shareholders would remain bright for at least the foreseeable future.

However, the potential downward trajectory of earnings at Sky means that the outlook for dividend growth here is becoming less certain. While the consensus for the current period implies cover that is close to 2x, which is more than reasonable, declining earnings in future periods will mean that cover deteriorates even without dividend growth.  

A Pavlovian response…

Regardless of how Pavlovian it sounds, buying on dips no longer seems like such a bad idea for existing and prospective shareholders at BT. However, I can’t help but feel that Sky shares could be about to indemnify the old adage of ‘buy low and sell high’.

With the above in mind, I’d probably be quite happy to contemplate the idea of buying BT for my own portfolio but if I were a Sky shareholder, I might be inclined to re-evaluate my position.

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.

James Skinner 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

Young black female footballer training on stadium pitch
Investing Articles

My JD Sports Fashion share price prediction for the second half of 2024

The JD Sports Fashion share price hasn't yet recovered from January’s slump. So will the retailer's stock bounce back in…

Read more »

Investing Articles

Up 47% in a week! Can the Capita share price continue to rocket?

The Capita share price has smashed the market in the last week, and Harvey Jones wonders whether it has the…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

What could the second half of 2024 have in store for the BAE Systems share price?

After a strong first six months of the year, what could be coming next for the BAE Systems share price?…

Read more »

Growth Shares

2 FTSE 100 stocks that are outperforming these MAG7 members

Jon Smith reveals some FTSE 100 stocks that offer him a viable alternative to the Magnificent 7, based on recent…

Read more »

Investing Articles

My Scottish Mortgage shares just paid me £14.88. It’s another step towards making a million

Harvey Jones has just received a measly dividend from his Scottish Mortgage shares, but he's got big, big plans for…

Read more »

Investing Articles

FTSE 100 shares: is Barclays a standout buy?

Barclays shares are among the FTSE 100's top performers and this Fool thinks they have further to go. He explains…

Read more »

Black woman using loudspeaker to be heard
Investing For Beginners

At 52-week highs, here’s what may be next for the Lloyds share price

Jon Smith notes the strong rally in the Lloyds share price in the recent past and explains why the good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

These UK shares are stinking out my ISA. Time to sell?

Paul Summers has been reviewing some of the worst-performing UK shares in his portfolio. Has the time finally come to…

Read more »