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Who Should You Buy: Vodafone Group plc Or BT Group plc?

AT&T’s plans to buy US satellite TV operator DirecTV didn’t make happy reading for Vodafone (LSE: VOD) shareholders. At least, not the ones speculatively holding out for a takeover.

As the FTSE 100 edged towards a record high Vodafone shares fell by 5p, on what looks to be the final nail in the coffin of an AT&T bid for the British telecom giant.

Still, In the interest of having a diversified portfolio it might be worth looking into telecoms. You might even already own shares in either Vodafone or BT (LSE: BT-A), or alternatively be wondering which firm to invest in.

Hopefully, after reading this article, you’ll have a clearer picture.

Vodafone

vodafoneVodafone’s business post-Verizon is heavily dependent on sluggish markets in Europe. The telecoms company is struggling in the region and reported a 10% fall in European revenues in its most recent results. Recession, regulation and rising competition are weighing heavily on operations. 

Yet economic forecasts for Europe are optimistic, with 2% growth forecast next year. Vodafone has made some smart strategic acquisitions — the recent purchase of the Spanish cable operator Ono for £6bn, as well as a £6.6bn deal to buy Kabel Deutschland last year — which will accelerate revenue growth.

More recently Vodafone has been pursuing growth organically. In recent years Vodafone’s presence on the British high street has become obscured by its major rivals. Both O2 and EE, with 350 and 600 stores respectively, are far more common. Vodafone is going to spend £100m opening 150 new stores in the next year and, pending the success of the new openings, could open even more.

Vodafone shares trade at 17 times forecast earnings, rising to 28 times in 2015. Given that its shares offer a prospective income of 5.2%, then despite their rich valuation, you may see have no qualms about adding Vodafone to your dividend portfolio. After all, it’s one of the top dividend payers in the FTSE 100. But dividend cover is slipping (merely 0.7 times earnings in 2015) which could indicate that a  cut is coming.

BT Group

BTShares in BT hit record highs in February. The share price has receded somewhat since then, and presently BT trades at 12 times forecast earnings (a shade below the FTSE 100’s 13.8 average). The yield isn’t spectacular (3.2% against the Footsie’s 3.5%) but, as we’ve seen with Vodafone above, a high yield isn’t always the opportunity you might think.

BT has many of the merits I look for when choosing a potential income stock. BT slashed its final dividend in 2009 on huge losses, but the business has since fully recovered, and the dividend has increased in each successive year. Analysts are bullish and believe the dividend will surge 20% to 11.9p in 2015, continuing to mushroom in 2016 (up 13% to 13.5p).

What’s more the dividend has solid cover of more than two times earnings in each of those years. I’d prefer an income stock like BT that yields around 3%,with the potential for sustainable growth, than a more eye catching 5%-plus that’s on less steady footing.

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Mark does not own shares in any company mentioned.