Here’s Why I’d Sell Vodafone Group plc And Buy NEXT plc And BP plc

I like the look of NEXT plc (LON: NXT) and BP plc (LON: BP), but I’d shun Vodafone Group plc (LON: VOD).

| 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.

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.

I used to be a fan of Vodafone (VOD), as it always looked like the mobile telecoms company most likely to get Europe connected up to fast wireless broadband. And when it sold off its stake in Verizon Wireless to Verizon Communications in 2013 for £1.04bn, it seemed it had the cash to do it.

In fact, I added Vodafone to the Fool’s Beginners Portfolio back in 2012, as it looked good value, but after the Verizon disposal and rumours of a takeover bid by AT&T, the shares have been trading at what I see as takeover levels — which is too high for current fundamentals, in my view. I dumped Vodafone in December 2013, and I still think that was the right decision.

With the shares at 219p, we’re still looking at a P/E of over 45 based on expectations for the year to March 2016, and that would only drop to 28.5 by 2018 after two years of forecast earnings growth — still around twice the FTSE average. Predicted dividends of more than 5% wouldn’t be anywhere near covered by earnings even then. I still think Vodafone will return to winning ways, but right now I see the shares as too expensive and I don’t want any.

High street champion

Next (LSE: NXT), on the other hand, has been a favourite of mine for some time, and it remains so despite the company’s warning that “2016 will be a challenging year with much uncertainty in the global economy“. That came with full-year results this morning, and helped send the share price down 14% to 5,725p at the time of writing.

But Next is still raking in the cash in by the bucket load, and in the year to January 2016 the firm returned £568m to shareholders through dividends (ordinary plus special) and £151m through share buybacks. The 388p in dividends per share paid for the year (158p ordinary, 230p special) represents a total yield of 6.8%.

I’m normally very wary of fashion retailers, but Next has such a strong reputation for its buying expertise, and it sells decent clothing at decent prices, rather than riskier top-label clobber to the fickle end of the market. That, coupled with a likely P/E of around the FTSE average even if 2016 is a bit tough, and those better-than-6% dividends, makes Next a ‘buy’ for me.

Fill up with oil

And BP (LSE: BP), well, I don’t see how it can possibly not be a strong ‘buy’ today, with the shares down 32% from their June 2014 peak to 350p. The fall is entirely due to the slump in oil prices, but the timescale of it has not taken BP by surprise — chief executive Bob Dudley reckoned some time ago that we could be in a cheap oil spell for two or three years or more, but was happy that BP could ride it out just fine.

The price of a barrel has been hovering around $40 for a couple of weeks now, up from $30 levels in February, and if that trend continues then BP shares could be heading upwards sooner then expected. But even if it still takes a while longer, BP shares are still on a modest P/E of under 13 based on 2017 forecasts.

On top of that, there are dividend yields of 7.7% forecast for this year and next — and BP reiterated its “commitment to sustaining our dividend and then growing free cash flow and shareholder distributions over the long term” at full-year results time earlier this month. I don’t see why you wouldn’t want some of that.

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.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »