Investors seem to have had a love/hate relationship with our big UK telecoms stocks over the years. But with the BT Group (LSE: BT.A) share price down 44% in five years, it might be good value now.
The Vodafone (LSE: VOD) share price is down even more, with a 60% crunch in the same time. Might that also be better value now?
Things in common
The two have a few things in common, and not just phones. They both face big capital expenditure each year to develop each new generation of telecoms technology. And I don’t see that changing any time soon.
They also both have a record of paying out cash. After the BT share price slide, the forecast dividend yield for 2023 stands at 6.1%.
At Vodafone, we’re looking at an unlikely 10.4% yield. Unlikely? I’ll come back to that.
They both seem to be on modest price-to-earnings (P/E) ratios too.
Value comparison
Here’s a look at a few key measures from the two firms:
| Company | BT Group | Vodafone |
| Recent share price | 122p | 71p |
| 1-year change | -30% | -45% |
| 5-year change | -44% | -60% |
| P/E ratio | 8.3 | 11.9 |
| Adjusted P/E | 21 | 29 |
| Dividend yield | 6.1% | 10.7% |
| Net debt | £18.9bn | £28.7bn |
| Market cap | £12.3bn | £19.6bn |
Look at those share price falls! I think they’re in part due to paying big dividends while building huge debt. That can often harm long-term value.
Adjusted P/E
What’s that adjusted P/E all about? The headline P/E can look fine, but it hides the effect that debt can have on the value of a stock.
So I add each firm’s net debt to its market-cap, which gives the cash it would take to buy the whole company and pay off its debt.
I then work out a new P/E based on that, which I think better shows the value of the business. It’s called an enterprise value P/E, and I think we should use it more often.
Those adjusted P/E ratios don’t look so good now, do they?
Vodafone dividend
So the Vodafone dividend looks unlikely? Well, forecast earnings don’t cover it, while BT’s dividend is twice covered by earnings.
At FY results time, Vodafone’s new boss Margherita Della Valle said: “Our performance has not been good enough. To consistently deliver, Vodafone must change.”
Will that change the firm’s policy on dividends and debt? I hope so, because I think it needs to.
It might even be a whole new start for Vodafone. I do think it has a good long-term outlook if it can firm up its finances.
Which is best?
I think Vodafone’s medium-term financial future is very uncertain. And I don’t see a safety buffer in its valuation to cover that.
I reckon BT has some of the same issues too. It does look a bit better value though. And I see less risk of a dividend cut. So if I had to pick, I’d go for BT. I’m not too thrilled by either right now though.
