Could Vodafone Group plc, KCOM Group PLC And BT Group plc Jump Start Your Portfolio’s Returns? 

Will Vodafone Group plc (LON: VOD), KCOM Group PLC (LON: KCOM) and BT Group plc (LON: BT.A) help your portfolio outperform?

| 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.

The defensive telecoms sector has been one of the few sectors that has put in a positive performance this year. For example, shares in Vodafone (LSE: VOD) and BT (LSE: BT.A) have returned 3% and 21%, respectively, this year including dividends, compared to a loss of around 3% for the FTSE 100. 

And it’s highly likely that these companies could outperform again next year as demand for the two companies’ services continues to trend higher. 

The cheaper pick 

Choosing between BT and Vodafone depends on your investment style. Value investors are likely to sway towards BT, as it’s the cheaper of the two. On the other hand, income investors might prefer Vodafone. Here are the key figures. 

BT currently trades at a forward P/E of 15.5. 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 2.6%, 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 3.5% for 2016/17. 

Vodafone currently trades at a forward P/E of 45.6. City analysts expect Vodafone’s earnings per share to increase 20% during 2017, which indicates that the company is trading at a 2017 P/E of 38.7. Vodafone’s dividend yield stands at 5.3%. 

However, if you’re not attracted to either of these companies, their smaller peer, KCOM (LSE: KCOM) might peak your interest. 

Surprising move

Kcom recently surprised shareholders by announcing that it was selling its national network infrastructure outside of Hull and East Yorkshire to AIM-listed CityFibre Infrastructure Holdings PLC for £90m.

This was a game-changing deal for Kcom for two reasons. Firstly, the cash infusion will allow the group to pay down debt and rebuild its balance sheet. For the six months to the end of September, Kcom reported net debt of £103m and a pensions liability of £16.1m. Pension contributions are set to cost the group £2.7m per annum for the next few years while debt interest costs are around £3m per annum. So, depending on how Kcom’s management splits the cash infusion, it’s clear that the group’s income will receive a boost from the lower financing costs. Management has already pointed out that on a proforma basis, group net debt has dropped to £13m following this deal. 

Better returns

As well as reducing debt, Kcom will be able to reinvest some of the cash received from the sale of its network infrastructure. It’s highly likely that Kcom will be able to reinvest the capital into assets that generate a higher rate of return than was possible with the network infrastructure. Indeed, telecoms infrastructure is notoriously expensive to build, but margins tend to be razor-thin. Selling low-margin networks to free up cash to reinvest in higher-margin services is quite common in the telecoms industry. 

Kcom’s shares currently trade at a forward P/E of 13 and support a dividend yield of 5.9%. The company’s shares could be in for a significant re-rating as the group pays down debt and reinvests in higher margin services. 

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 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 »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Recommended by Warren Buffett, this top hedge fund’s betting on Rolls-Royce shares

When Warren Buffett ended his previous investment partnership, he recommended Bill Ruane’s Sequoia Fund. Today, its largest investment is in…

Read more »