It’s been a slightly disappointing 2014 for investors in BT (LSE: BT-A), with shares in the telecoms company being flat since the turn of the year. Of course, this is a better performance than that of the wider index, with the FTSE 100 being down 2% over the same time period. However, after making gains of 62% in 2013 and there being huge optimism surrounding its prospects, BT seems to have underperformed in 2014. That said, its potential remains, especially with regard to the pay-TV market. Does this mean that it is now the top telecom investment in the FTSE 100, thereby ousting Vodafone (LSE: VOD) from its long-held position as #1?
BT and Vodafone have adopted different strategies with regard to how they are attempting to grow their respective businesses. While BT has taken an aggressive stance in the pay-TV market, through bidding high for football and other sports rights in an attempt to gain customer loyalty and product differentiation, Vodafone is being far more passive in its approach. Indeed, Vodafone seems content to slowly buy up what it feels are undervalued European assets, such as Kabel Deutschland and Spain’s Ono, while the Eurozone economy is going through a challenging period. Its aim, therefore, is to play the long game and be very well-positioned when growth (eventually) returns to Europe. Such a strategy requires a large amount of investor patience.
Clearly, Vodafone’s strategy is likely to take many years to come to fruition, although if it does then it could be well-worth waiting for. However, it means that growth potential is rather limited in the shorter term, with earnings forecast to increase by only 5% next year. This contrasts with BT, where its more aggressive strategy is set to start paying off much more quickly, with earnings per share (EPS) expected to rise by 7% next year.
In addition, BT has a far more stable earnings track record than Vodafone. Over the last five years it has increased the bottom line in every year, with growth averaging a highly impressive 12% per annum. Contrast this to Vodafone, which has seen profit fall in three of the last five years and it’s clear that BT could prove to be the more reliable option going forward.
Indeed, this could prove to be the deciding factor between the two companies. Certainly, Vodafone’s strategy is worth pursuing and could lead to a hugely profitable company a number of years down the road. However, investing in the company could entail a relatively large number of lumps and bumps along the way, as Eurozone growth looks likely to stutter for a little while yet. Contrast this to BT, which is delivering on its strategy right now, and it could be argued that BT is the more attractive telecom play. So, while both companies could make a positive impact on your portfolio, only the most patient investors may wish to choose Vodafone over BT at the present time.
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Peter Stephens has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.