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One FTSE 100 stock I’d buy ahead of BT Group plc

Shares in BT Group (LSE: BT.A) have been on a steady slide for the past few months. Gavin Patterson, chief executive of the telecoms giant, just can’t seem to catch a break after revelations of an accounting scandal at its Italian division wiped billions off its market value in January.

The group’s financial performance has only deteriorated since then — pre-tax profits fell by more than 40% during the firm’s first quarter after it was forced to pay out £225m to Deutsche Telekom and Orange, to avoid legal action related to its Italian accounting scandal and its purchase of EE.

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Overall revenues climbed by just 1% to £5.8bn, as growth slowed on the consumer side and wholesale revenues continued to shrink.

Dividend risk?

Looking ahead, there are growing concerns about the sustainability of BT’s dividend policy as capital expenditure is being ramped up. BT has pledged to spend billions over the next few years on upgrading its Openreach and EE networks. At a time when its revenues are coming under increasing pressure from its rivals and margins are being squeezed by the spiralling cost of sports rights, this would likely crimp cash available for dividends.

Shares reached a new 52-week low yesterday and are now trading at just 9.8 times forward earnings. With such a low valuation multiple, it is apparent that investors are concerned about the additional possible downside in the months to come.

A better buy?

Meanwhile, I reckon that Sky (LSE: SKY) could be a safer buy for investors looking for a FTSE 100 pick.

Fundamentals are still going strong for the satellite broadcaster, following an upbeat trading update this morning. Like-for-like revenue increased 5% to £3.3bn in the three months to 30 September, as it delivered another strong quarter for customer growth. Some 160,000 new customers joined the company in the first quarter — a 51% increase on the same period last year, reflecting the success of its airing of Game of Thrones and original commission drama Riviera.

Fox’s offer of £10.75 per share

Shares in Sky are up 2% today, but they’re trading at a 14% discount to Rupert Murdoch’s 21st Century Fox offer price of £10.75. And that’s before we take into account the 10p per share special dividend which shareholders would get if the deal is completed after 31 December 2017.

Although the acquisition is far from a done deal as Murdoch’s £11.7bn Sky takeover bid is referred to Competition and Markets Authority, I think its shares are still an attractive arbitrage opportunity as the downside risk seems limited. Sky’s underlying financial performance is improving and valuations seem undemanding, with shares in the company trading at 14.4 times this year’s expected earnings.

What’s more, if the deal falls through because of a failure to clear regulatory hurdles by 15 August 2018, Fox would have to pay a £200m break fee to Sky. This could potentially lead to a windfall payment to Sky’s shareholders, which would reduce the downside impact of the deal falling through.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.