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Why I Would Buy Vodafone Group plc And BT Group plc But Sell BG Group plc

Today I am analysing the investment case for three of the London Stock Exchange’s biggest stocks.

Vodafone Group

At first glance, telecoms leviathan Vodafone (LSE: VOD) (NASDAQ: VOD.US) may not appear particularly attractive value for money. The business has long been rocked by the impact of tough competition and regulatory issues in its European marketplaces, problems which are anticipated to push earnings 63% lower in the year concluding March 2015.

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More recently, however, Vodafone has seen customer demand pick up in these key regions, partly as macroeconomic conditions have improved but also due to the impact of its gargantuan $13bn Project Spring investment programme in boosting its voice and data services. Consequently, the firm is expected to report a much improved 1% loss for fiscal 2016, before bouncing back into the black with a 20% advance in 2017.

These figures leave the company dealing on P/E ratios of 34.7 times prospective earnings for 2016 and 29.5 times for 2017, soaring above the benchmark of 15 times or below which is widely regarded as attractive value for money. But I believe that Vodafone fully merits this premium owing to the quality of its operations, not to mention the surging progress reported in Asian markets and recent entry into the lucrative ‘quad-play’ services sectors in Germany and Spain.

As well, Vodafone’s generous dividend policy also helps to offset these high earnings multiples, with the City expecting total payouts of 11.8p per share in both 2016 and 2017. As a consequence the business carries a market-busting yield of 5.4% through to the close of 2017.

BT Group

Like Vodafone, I believe that BT Group’s (LSE: BT-A) (NYSE: BT.US) huge investment in the multi-services space should support solid profits growth. The firm’s multi-year fibre laying programme, combined with the success of its BT Sport channels, continues to drive its retail customer base higher — indeed, revenues at its Consumer division leapt 7% during September-December, to £1.1bn. And I expect sales to pick up still further following its acquisition of mobile operator EE last year.

BT has a proud record of delivering reliable annual earnings expansion, and the business is expected to follow growth of 6% in the year concluding March 2015 with rises of 3% and 7% in 2016 and 2017 correspondingly. These numbers leave the business changing hands on a P/E ratio of 14.9 times for the outgoing year, and which slips to a lip-smacking 14.3 times for next year and 13.3 times for 2017.

And despite the strain of heavy capital expenditure on the balance sheet, the effect of steady earnings growth is expected to keep the full-year dividend rattling higher throughout this period. Indeed, an estimated 12.8p per share payment for fiscal 2015 is primed to rise to 14.7p in 2016, before marching to 16.6p in 2017. Consequently, the yield leaps from 2.8% for 2015 to 3.3% in 2016 and 3.7% the following year.

BG Group

With the oil price expected to remain under the cosh for some time to come, I believe that BG Group (LSE: BG) remains a stock not for the faint of heart. Although output is expected to spew forth from its Australian and Brazilian assets from this year onwards, the prospect of a prolonged supply/demand imbalance across the crude market looks set to crimp revenue growth.

BG Group saw earnings slide 8% in 2014 as a result of last year’s oil price collapse, and an environment of persistent pressure this year is anticipated to drive the bottom line 65% lower in 2015. As a result the fossil fuel giant changes hands on a ridiculously-high P/E rating of 31.5 times for this year.

And although the City expects BG Group to record a 91% bounceback in 2016 — in turn pushing the earnings multiple to a far-improved 15.3 times — I believe that such a rebound is unlikely given that OPEC has vowed to keep production flowing, and US shale output is expected to remain plentiful, even in spite of a falling rig count.

Similarly I reckon that expectations of chunky dividend hikes this year and next are overly-optimistic. Current forecasts point to a total payment of 19.6p per share in 2015 and 21.2p next year, up from 18p last year and driving the yield to 2.4% and 2.6% for these years. But with last month’s announced capex cuts underlining the stress on the balance sheet, in my opinion predictions of such payment rises could be a hope too far.

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Royston Wild has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.