3 Reasons Why KCOM Group PLC Is A Better Investment Than Vodafone Group plc

When Vodafone  (LSE: VOD) (NASDAQ: VOD.US) revealed its full year results last month, the company shocked the market. Excluding the one-time gain from the Verizon deal, Vodafone revealed a record slump in revenue and profits.

However, Vodafone’s smaller UK peer, KCOM (LSE: KCOM) revealed its full year results today and the company’s performance put Vodafone to shame. 

Rising profitsVodafone

For the year ending 31 March 2014, KCOM reported a pre-tax profit of just under £51m, up 6% year on year. Further, the company’s earnings per share ticked up to 7.6p, a year on year gain of 8%.

These solid results are a result of KCOM’s drive into the broadband and telecom services markets, to offset falling fixed line income. Actually, KCOM’s management has stated that the demand for the company’s fibre network has been ahead of expectations and above UK averages. 

Vodafone however, did not report the same kind of upbeat results. Indeed, Vodafone’s adjusted full year earnings per share fell 13% year on year, and operating profit slumped 37%. This terrible performance was a result of tough trading conditions within Europe. 

Dividend growth

KCOM’s impressive results and growth, have allowed the company to commit itself to 10% per annum dividend hikes through to March 2016. At present, the company’s shares support a dividend yield of just under 5%. 

Now, as Vodafone is one of the FTSE 100’s dividend stalwarts, it may seem odd to suggest that KCOM’s payout is more attractive. However, KCOM is not suffering the same pressures as Vodafone and the company’s dividend payout looks to be more secure than that of its larger peer.  

Indeed, while Vodafone did hike its annual dividend payout by 8% this year, the company reported a 22% slump in cash generated from operations, the income that’s used to fund the dividend payout. 

Specifically, Vodafone only generated £6.2bn in cash from operations during 2013, while the dividend payout cost £5bn. This does not leave much room for error at all.

In comparison, KCOM’s cash flow from operations jumped around 50% during 2013 and the company’s dividend payout is now covered nearly three times by operational cash flow. 

Sales growth

And the last reason why KCOM is more attractive than its larger peer Vodafone, is to do with the company’s growth prospects.

KCOM’s revenue actually fell 0.6% over the course of the last year. However, while the company suffered from a decline in fixed-line income, higher margin services such as fibre and enterprise solutions took up the slack — the reason for the company’s rising profit. 

Moreover, KCOM was able to drive this growth without hefty capital expenditure. The company only spent around 40% of cash generated from operations, unchanged from last year.

Meanwhile, Vodafone is having to spend $19bn in an attempt to drive growth within Europe. This expenditure excludes the billions spent on acquisitions. 

Foolish summary

So overall, based on KCOM’s expanding profits, solid dividend and growth prospects, I feel that the company is a better pick than Vodafone. 

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Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in KCOM.