The Motley Fool

Could KCOM Group PLC Be A Better Investment Than BT Group plc?

BT (LSE: BT-A) has proved to be a very lucrative investment over the past five years. Since 2011, BT’s shares have returned 25.6% per annum for investors, outperforming the wider FTSE 100 by 19.7% per annum over the period. This kind of performance would be difficult to find elsewhere, but now, after five years of staggering gains, BT’s shares look expensive. At time of writing the shares are trading at a forward P/E of 16 and only offer a dividend yield of 2.5%. Further, BT’s earnings per share are only expected to grow by 4.1% during the next two years. This pales in comparison to the annual double-digit earnings growth BT has reported since 2011. 

Overall, BT’s shares have had a great run since 2011 but the company’s growth rate is starting to cool, and BT’s shares are beginning to look expensive. On the other hand, shares in KCOM (LSE: KCOM) don’t come with a rich valuation, in fact, compared to the rest of the telecoms sector, KCOM looks drastically undervalued. 

KCOM’s shares currently trade at a forward P/E of 12.5 while the wider fixed line telecommunications sector trades at an average P/E of 20.9. But KCOM’s most attractive quality is the company’s dividend payout, which management has been increasing at a rate of 10% per annum for the past few years. And now, KCOM’s dividend yield is set to hit an impressive 6.1% next year, based on the current share price. The payout is on track to be covered one-and-a-half times by earnings per share, so even though KCOM’s yield is above the market average, it doesn’t appear to be under threat. 

Still, having said all of the above, KCOM’s growth leaves much to be desired. Group earnings per share have hardly moved since 2012 as the company has struggled to attract customers. Revenue has contracted by 10% over the same period. City analysts don’t expect KCOM’s fortunes to improve anytime soon. Earnings per share are set to contract 4% for the year ending 31 March 2016 but then increase by 2% the year after. 

However, even though the City believes that KCOM will struggle to find growth going forward, the company struck an upbeat note recently when it reported its results for the six months to the end of September. Pre-tax profit increased 2.5% to £24.2m and revenue expanded 2.8% driven by 4% growth in the group’s Kcom enterprise segment and 2% growth for its SME-focused unit. The group plans to continue investing in its network throughout the rest of the year and into 2016, if this leads to a similar level of growth as seen during the first half of the year, there’s a change KCOM could outperform City expectations. Nevertheless, even if KCOM continues to report lacklustre growth, investors are still set to receive a dividend yield of 6.1% next year. If anything, KCOM shares are worth buying for the income alone. 

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