Should You Be Buying BT Group plc Or Vodafone Group plc?

BT (LSE: BT-A) and Vodafone (LSE: VOD) are both on sale. Since the beginning of August, the two telecom giants have dramatically underperformed the FTSE 100. Now they look attractive for the long-term income-seeking investor. 

Indeed, over the past ten weeks BT’s shares have fallen 7%, underperforming the FTSE 100 by 2.3%, while Vodafone’s shares have slumped 13.2%, underperforming the wider FTSE 100 by 8.5%. These losses have wiped out most of BT and Vodafone’s gains for this year.

But after these declines it could be time to by Vodafone and BT, as their valuations have now returned to more attractive levels.

The question is, which one of these telecom giants should you pick? 

Crunching numbers

A quick look at the figures reveals that BT is the cheaper of the two companies. Although, for income seekers, Vodafone could be the better pick. 

BT currently trades at a forward P/E of 13.5. Earnings per share are expected to fall by 3% this year but rebound 7% during the company’s next fiscal year. BT currently supports a dividend yield of 3%, and analysts expect the company to hike the payout by 5% per annum for the next two years, leaving the company with a dividend yield of 3.7% for 2016/2017. 

On a P/E basis, Vodafone is more expensive than BT. The company currently trades at a forward P/E of 43. City analysts expect Vodafone’s earnings per share to increase 20% during 2017, which indicates that the company is trading at a 2017 P/E of 34. Vodafone’s dividend yield stands at 5.6%. 

However, by using other multiples to value Vodafone, we get a different result. For example, using the enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) ratio, which measures cash earnings without accrual accounting and cancels the effects of different capital structures, Vodafone looks to be the cheaper bet. 

Vodafone trades at an EV/EBITDA ratio of 6.7 compared to BT’s 7.3. What’s more, Vodafone trades at a price to operating cash flow figure of 5.7, compared to BT’s 8.5. 

Multiple factors 

Not only is Vodafone is cheaper than BT on several metrics, but the company is also well positioned to grow over the long term. 

While BT focuses on fighting peer Sky for market share here in the UK, Vodafone is busy expanding overseas. The group’s new European infrastructure project has helped it become one of the most dominant mobile providers within Europe. Moreover, Vodafone’s emerging market businesses in India and Africa are growing at a double-digit clip.

On the other hand, BT struggling to fight Sky for market share in the pay-tv market, and the company is facing calls to be broken up, to improve competition. Vodafone itself has complained to the regulator Ofcom that BT generated £6.5bn of “excessive profits” during the past ten years from its Openreach division, which controls the national broadband network.

The bottom line

So, Vodafone looks to be a better bet than BT. The company is cheaper than its peer on many metrics, offers a better dividend yield for investors and has brighter growth prospects. 

If that's not enough for you, then our analysts here at The Motley Fool believe they've discovered a company that will make an excellent replacement for Vodafone in your portfolio. 

The company in question has the potential to increase sales by 300% to 500% over the next few years. This is one of the most impressive growth stocks around. What's more, few have realised its potential.

To find out more download our free report today. The report will be delivered to your inbox immediately, and there's no further obligation.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.