BT (LSE: BT.A) shares are a popular investment in the UK. And I can understand why – this is a company that’s been around for ages, is a major player in the UK telecoms space, and pays decent dividends.
I reckon investors can do better than BT however. With that in mind, here are two shares I believe will outperform the telecoms stock over the next five years.
What’s wrong with BT shares?
At first glance, BT shares appear to have a lot going for them. At 187p, they’re trading on a forward-looking price-to-earnings (P/E) ratio of just 10, so they’re quite cheap. As for the dividend yield, it’s about 4.6%. So there’s potential for a decent level of income here.
Dig deeper however, and things don’t look quite so attractive. Take revenue growth (a key driver of long-term returns), for example – it’s non-existent. As for the balance sheet, it remains loaded with debt. That means interest payments are going to take a chunk out of profits.
Speaking of profitability, this is very low – over the last five years return on capital employed (ROCE) has averaged just 6%. Generally speaking, companies with a high ROCE (eg 15%+) tend to be much better long-term investments than those with low ROCEs.
More growth potential
So what stocks could potentially beat BT over the next five years in my view? Well, one is FTSE 250 stock IG Group (LSE: IGG), a provider of trading and investment platforms.
It trades on roughly the same P/E ratio as BT. The yield’s quite similar too (4.4%).
I see a lot more growth potential here though. Not only should this company benefit from volatile markets in the years ahead (ie more trading activity) but rising markets should boost income from investment management services (note that it owns Freetrade).
It’s also far more profitable. Over the last five years, ROCE has averaged 23%.
A risk here is competition. Today, the trading and investment markets are fiercely competitive and IG’s facing competition from the likes of Robinhood and Trading 212.
I like the risk/reward skew though. In my view, this stock’s worth considering as a long-term investment.
Far more profitable than BT
Another stock with more potential, in my view, is Computacenter (LSE: CCC). It’s a leading provider of IT solutions to public and private organisations.
I reckon this company is really well placed to benefit from the digital transformation trend. It can help organisations with everything from artificial intelligence (AI) to cybersecurity.
Now, this stock’s more expensive than BT. The P/E ratio here is 17.5. As for the yield, it’s lower than BT’s. Currently, it’s about 2.5%.
I wouldn’t be put off by these metrics however. This company’s growing at a much faster rate than BT – over the last five years, revenue’s climbed about 40%. It’s also far more profitable (five-year average ROCE of 25%) and sports a much stronger balance sheet.
Of course, a slowdown in tech spending’s a risk here. This could occur if the economy takes a downturn.
Taking a five-year view though, I’m optimistic this company will see solid growth. I think it’s worth considering as an alternative to BT.
But others here at The Motley Fool could have different opinions…
