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Could the Vodafone share price become the next BT?

The Vodafone (LSE: VOD) share price has been a disappointing investment over the past three and five years, but the company’s performance is significantly better than peer BT (LSE: BT.A)

Over the past five years, including dividends to investors, the Vodafone share price has returned 0.06% per annum, underperforming the FTSE 100 by 6.7% per annum. This return is pretty weak, but it’s not as bad as the performance suffered by shareholders in BT.

Over the past five years, shares in BT have underperformed the FTSE 100 by around 14% per annum, and over the past three years, the stock has underperformed the UK’s leading blue-chip index by 25%! 

The question is, could Vodafone’s shareholders suffer the same fate? Today, I’m going to try and answer that question. 

Trouble ahead? 

While Vodafone and BT are different companies they both have similar problems. They have a mountain of debt and are struggling to grow in the increasingly competitive telecommunications market. 

To its credit, Vodafone has been more proactive when it comes to cleaning up its balance sheet. Back in May, the company cut its full-year dividend by 40%, freeing up cash to invest in building out its European 5G network and pay down debt. Its dividend payment of €4.1bn a year was one of the biggest in the FTSE 100 until the reduction. 

This is a small step in the right direction and it is part of a much bigger plan. Vodafone has €27bn of net debt and is also planning to pay €18.4bn in a deal to acquire Liberty Global’s German and eastern European cable assets. To reduce liabilities, management has several asset sales and spin-offs in the works, which should chip away at the group’s obligations before they get out of hand. 

By comparison, BT hasn’t cut its dividend and is struggling to reduce debt. Further, the company is under pressure from regulators to increase its investment in fibre networks, which has lagged competitors for some time. BT’s lack of spending means the business is losing market share to more agile players in the UK telecoms market, including Vodafone.

Meanwhile, Vodafone is Europe’s most significant fixed-line player with 54m customers on its network and biggest TV distributor with 22m subscribers. The company has invested £19bn in its systems since 2013.

The better buy

Considering all of the above, I would say Vodafone is a better buy than BT and will remain so. The company’s pro-active approach regarding its dividend and balance sheet is, in my mind, a big positive. And while the stock’s dividend yield has fallen substantially after the cut, it’s still a highly attractive 6.7% compared to BT’s 7.9%. 

Shares in Vodafone are also cheaper than those of BT on a cash flow basis. The stock is trading at a price to free cash flow ratio of just 8.2, compared to BT’s multiple of 33. All in all, it looks to me as if Vodafone is the better buy, if you’re after income and capital growth over the long term.

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Rupert Hargreaves owns no share 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.