Could KCOM Group PLC Be A Better Investment Than BT Group plc?

Could KCOM Group PLC (LON: KCOM) replace BT Group plc (LON: BT.A) in your portfolio?

| 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) has proved to be a very lucrative investment over the past five years. Since 2011, BT’s shares have returned 25.6% per annum for investors, outperforming the wider FTSE 100 by 19.7% per annum over the period. This kind of performance would be difficult to find elsewhere, but now, after five years of staggering gains, BT’s shares look expensive. At time of writing the shares are trading at a forward P/E of 16 and only offer a dividend yield of 2.5%. Further, BT’s earnings per share are only expected to grow by 4.1% during the next two years. This pales in comparison to the annual double-digit earnings growth BT has reported since 2011. 

Overall, BT’s shares have had a great run since 2011 but the company’s growth rate is starting to cool, and BT’s shares are beginning to look expensive. On the other hand, shares in KCOM (LSE: KCOM) don’t come with a rich valuation, in fact, compared to the rest of the telecoms sector, KCOM looks drastically undervalued. 

KCOM’s shares currently trade at a forward P/E of 12.5 while the wider fixed line telecommunications sector trades at an average P/E of 20.9. But KCOM’s most attractive quality is the company’s dividend payout, which management has been increasing at a rate of 10% per annum for the past few years. And now, KCOM’s dividend yield is set to hit an impressive 6.1% next year, based on the current share price. The payout is on track to be covered one-and-a-half times by earnings per share, so even though KCOM’s yield is above the market average, it doesn’t appear to be under threat. 

Still, having said all of the above, KCOM’s growth leaves much to be desired. Group earnings per share have hardly moved since 2012 as the company has struggled to attract customers. Revenue has contracted by 10% over the same period. City analysts don’t expect KCOM’s fortunes to improve anytime soon. Earnings per share are set to contract 4% for the year ending 31 March 2016 but then increase by 2% the year after. 

However, even though the City believes that KCOM will struggle to find growth going forward, the company struck an upbeat note recently when it reported its results for the six months to the end of September. Pre-tax profit increased 2.5% to £24.2m and revenue expanded 2.8% driven by 4% growth in the group’s Kcom enterprise segment and 2% growth for its SME-focused unit. The group plans to continue investing in its network throughout the rest of the year and into 2016, if this leads to a similar level of growth as seen during the first half of the year, there’s a change KCOM could outperform City expectations. Nevertheless, even if KCOM continues to report lacklustre growth, investors are still set to receive a dividend yield of 6.1% next year. If anything, KCOM shares are worth buying for the income alone. 

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 KCOM Group. 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

Investing Articles

Up 51% in 2024, this FTSE 250 stock is flying!

This writer takes a look at one high-flying FTSE 250 share that still looks good value despite surging to an…

Read more »

Investing For Beginners

Here’s how I’m trying to prevent a stock market crash from ruining my portfolio

Jon Smith explains which shares he's avoiding and what he's thinking of buying to try and protect his portfolio from…

Read more »

Bearded man writing on notepad in front of computer
US Stock

Call me crazy, but here’s why I’m eyeing up the CrowdStrike share price

Jon Smith notes the carnage caused by Friday's global outage, but flags up why he's thinks the CrowdStrike share price…

Read more »

Investing Articles

What do Hargreaves Lansdown results mean for the share price?

The Hargreaves Lansdown share price has surged in recent months on takeover expectations, but what will the recent results mean…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Newly minted S&P 500 stock CrowdStrike just crashed! Here’s why

Shares of S&P 500 firm CrowdStrike collapse as the company lies at the centre of a global IT outage. What…

Read more »

artificial intelligence investing algorithms
Investing Articles

Is Nvidia heading for the mother of all tech stock crashes?

Nvidia stock has soared, and the company briefly became the most valuable on the planet. But not everyone’s an AI…

Read more »

Dividend Shares

The BP share price is down 15% in 3 months. Time to buy?

In the space of just a few months, the BP share price has fallen by a double-digit percentage. Is this…

Read more »

Investing Articles

A 5.4% dividend bargain I’ll buy over Lloyds shares

Harvey Jones loves his Lloyds shares but now he's found a high-yielding FTSE 250 stock that may offer even more…

Read more »