As an investment theme, telecommunications is red hot right now. With more people working from home than ever before, there is a global thirst for fast, reliable broadband connection. In addition, the desire to roll out 5G networks provides further growth opportunities for revenue and profit for those companies with market exposure. The telecommunications market has high barriers to entry, what Warren Buffett would deem an “economic moat”, so there are only a few companies that can benefit from this opportunity. The two companies I am going to focus on are FTSE 100 behemoths BT (LSE: BT-A) and Vodafone (LSE: VOD).
BT: a FTSE 100 value stock?
BT has been nothing but “bloody trouble” since 2016 when I first invested in the stock, and its share price has plummeted in value by 65%. The investment at the time was based on the successful acquisition of EE, alongside the continued subscription growth of BT Sport, which had just obtained rights to show Premier League football. Since then shareholders have endured an Italian accounting scandal, Brexit, the burden of an enormous pension deficit and the threat of government regulation. The only silver lining was the generous dividend, one of the highest in the FTSE 100, which the coronavirus has just kicked into touch.
Value investors believe that BT shares are oversold and have the potential to make a strong recovery that could make you rich. Speculation of a multi-billion-pound external investment in Openreach, future cost savings via mass redundancies and the opportunity to invest the once allocated dividend monies into new profitable ventures is a persuasive reason to invest.
Frustratingly, it feels like one-step forward and two back for FTSE 100 constituent BT. The recent partnering of Virgin Media and O2 is a double blow, as not only does this increase sector competition, but Virgin Media was previously partnered with BT-owned EE. This news, coupled with the ever-increasing competition in the pay-to-view TV market and the £0.5bn cost implication of not using Huawei products, could potentially cap the potential upside of any recovery. If you were investing for short-term profit, BT may make you a quick buck, but as a long-term investment case I’m still not convinced.
Vodafone: growth and income rolled into one?
Vodafone, by comparison, is the second biggest telecommunications company in the world. As such, it enjoys greater international exposure to a global growing market.
Despite last year’s dividend cut, Vodafone still yields a healthy 5.8%, which is excellent news for income investors. The FTSE 100 stock currently trades at a 14% discount from its year-high, which could quickly rebound if the market recovery continues and positive sector sentiment remains. Growing annual profits of £14.3bn and total assets of £168bn will make servicing the net debt of £8bn more than manageable and still provide enough flexibility for strategic acquisitions (just like the recent one with Virgin Media) should the right opportunity arise.
On balance, I think Vodafone’s exposure to the telecommunication market in 25 different countries and the compounding potential of its generous dividend makes it more likely to achieve your investment goals in the long term.
