Vodafone vs BT shares: which would I buy for 2022?

Vodafone stock and BT shares have had a horrible five years, dropping by 45% and 56%, respectively. But which stock would I buy today for a brighter 2022?

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The past five years have been gruesome for holders of two large UK telecoms stocks. Both BT Group (LSE: BT.A) shares and Vodafone Group (LSE: VOD) stock have dived in the past half-decade. Furthermore, BT and Vodafone both took a beating during 2020’s Covid-driven market meltdown. But I see potential for value in these unloved stocks.

BT shares get battered

It’s been mostly heartbreak for owners of BT shares since late 2016. Just before Christmas 2016, the BT share price closed at 370.35p on 23 December. Last Friday, it closed at 167.4p. That’s a collapse of more than half (-55.8%) in five years. But things looked even worse last year. During the depths of the Covid-19 crash, BT shares hit a low of 94.68p, before recovering to end the year at 132.25p. The BT share price hit its 2021 high of 206.7p on 23 June, but then went into a four-month slide. On 25 October, this popular stock closed at 135.2p, giving up almost all of its 2021 gains.

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Vodafone has a tough year

Still, at least BT shares are up by almost a quarter (+23.7%) in a year. That’s more than can be said for the Vodafone share price, which has lost 8.9% over 12 months. What’s more, Vodafone shares have crashed by 44.6% over the past five years (over 10 percentage points better than BT’s slump). Vodafone has also lost 14.2% of its value over the past six months. And it’s worth less than half of the 236.8p it closed at on 5 January 2018. Ouch.

BT versus Vodafone: fundamentals

Summing up, both stocks have been dogs for half a decade and more. But investors buy a company’s future, not its past. So, is there scope for BT and Vodafone to recover? Let’s look at the underlying fundamentals of these telecoms titans:

Company Share price (p) 52-week range (p) Market cap (bn) Price/earnings Earnings yield Dividend yield
BT Group 167.4 120.45 to 206.70 16.6 16.2 6.2% 4.6%
Vodafone 111.12 106.3 to 142.74 30.2 N/A N/A 6.8%

As you can see, Vodafone’s market value is almost twice that of BT, the UK’s former telecoms monopoly. However, the enterprise value of both firms is way higher than their market values. This is because they both have huge debts on their balance sheets. At 30 September 2021, BT’s net debt was £18.2bn, £1.6bn larger than its market cap. In addition, BT has a pension deficit of around £8bn. Also at 30 September, Vodafone had net debt of €44.3bn (£37.6bn). Again, this exceeds the market value of its shares by £7.4bn.

Which would I buy today?

For the record, I consider many European telecoms stocks to be undervalued, including BT and Vodafone. I don’t own either stock at present, yet I’d buy both today — and for different reasons. First, I’d buy Vodafone shares for their market-beating dividend yield. Their current cash yield of 6.8% a year is 1.7 times the dividend yield of the wider FTSE 100 index. As an income-seeking value investor, this cash payout is right up my street.

Second, I’d buy BT shares today for their recovery potential. In recent years, BT’s bosses became adept at stepping into problems. As a result, the company endured repeated blow-ups, damaging its reputation. But French-Moroccan billionaire Patrick Drahi has built an 18% stake in BT this year. Thus, at least one market pro agrees with me about BT’s future prospects!

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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