It’s always tempting to buy shares for your portfolio with a name that’s familiar, such as BT (LSE: BT-A), which is one of the biggest companies in the UK and has earned itself a place in the FTSE 100. To sweeten the deal, the shares also support a market-beating dividend yield of 5.9%.
However, while BT’s size might make it attractive from an investment perspective, it has attracted the ire of regulators. At the same time, customers are becoming fed up with the company’s shoddy service, high prices and lack of investment.
Struggling for growth
I think these factors could hold back the company’s growth for some time. Not only is BT struggling with its own problems, but it also has to fight against a wave of new entrants to the telecoms market.
These businesses are seeking to capitalise on BT’s weakness by offering customers a better service, at a lower price. And in a world where most people have mobile phones, and you can compare the prices of broadband providers at the click of a button, BT is at an extreme disadvantage to the rest of the industry.
The problem is, the company just doesn’t have a unique product, unlike soft drink producer Nichols (LSE: NICL).
Nichols is, in many ways, an overlooked gem. This £550m market-cap company produces soft drink Vimto, which is sold in 85 markets around the world. It also owns the Feel Good Drinks brand, and the rights to produce Levi Roots beverages in the UK, as well as Sunkist.
Small but mighty
Nichols is small but mighty. City analysts are expecting it to report revenues of £139m for 2018, which pales in comparison to BT’s £23.4bn.
Nevertheless, Nichols’ strength is its unique products, which customers love and are willing to pay a premium for. For the last financial period, the group reported an operating profit margin of 22%, and return on capital employed — a measure of profit for every £1 invested in the business — of 27.5%. In my opinion, these figures show the strength of the business.
BT, on the other hand, reported a return on capital employed of 10% for 2018, and operating profit margin of 14%.
Nichols also beats its larger peer on other growth metrics as well. For example, over the past five years, BT’s earnings per share (EPS) have hardly grown. With its unique portfolio of brands, Nichols as reported average EPS growth of 8.7% for the same period.
So, while Nichols might only be a fraction of the size of BT, the company is punching above its weight.
Analysts expect this trend to continue. The company’s range of low sugar and healthy drinks is helping it win over more customers, who are increasingly becoming more health conscious.
Finally, the company has much better dividend credentials than its FTSE 100 peer. At the end of fiscal 2017, the firm reported a net cash balance of £36m, and the dividend for full-year 2018 will be covered twice by EPS, according to analysts. In comparison, BT has over £12bn of debt and dividend cover is falling.
For me, there’s no question. With its fat profit margins, unique products, strong balance sheet, and record of growth, I think Nichols is a better buy than BT.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Nichols. 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.