The BT Group (LSE: BT-A) share price has risen by 69% over the last year. Rival Vodafone Group (LSE: VOD) has managed a gain of just 16%.
However, if we take a step back, we find that BT shares are still down by nearly 50% on a five-year view. Vodafone is only slightly better, down by around 40%. Both companies have also cut their dividends during this period.
These businesses have not been great investments in recent years. But they do still have market-leading brands and big market share. Both companies are under new management too. I’ve been taking a fresh look to see which one I’d buy today.
BT share price: is it too late?
BT has a near-monopoly of the UK’s broadband infrastructure. It also owns the UK’s largest mobile network, EE. This business really ought to be able to make money — and it does. BT’s results for the year to 31 March showed that it made a pre-tax profit of £1.5bn on revenue of £21bn.
Surplus cash generated during the year came in at £1.5bn, but unlike in previous years, shareholders did not receive a dividend. This unusual situation highlights one of BT’s big problems. Although it makes a lot of money, it can’t stop spending.
Capital expenditure last year was £4.2bn. The company also paid out £0.9bn in finance costs and made a £1bn payment to try and reduce its £5.1bn pension deficit. Similar levels of spending are likely over the next few years, as BT cranks up its efforts to expand its fibre broadband and 5G mobile networks.
I reckon BT’s dominant market share should allow the company to provide best-in-class services while benefiting from economies of scale. But this story hasn’t played out very well in recent years, so I could be wrong. I certainly don’t think there’s much room for error.
Broker forecasts suggest that BT’s profits will grow by no more than 5% over the next couple of years. BT’s share price of 200p means the stock is already trading on 10 times earnings, while the forecast dividend yield has fallen to just 3.7%.
I’d say BT shares are probably high enough at the moment.
Vodafone stock: African growth potential
Vodafone is known as a mobile operator in the UK, but it also operates major broadband networks in much of western Europe. The group doesn’t suffer from BT’s pension problems, but Vodafone is similar in other regards — it has a lot of debt, big spending plans, and doesn’t generate much growth.
However, I’m more positive about the medium-term outlook for Vodafone. I like the group’s pan-European presence in mobile, and I’m excited about the growth potential of its operations in Africa.
Vodafone is one of the largest mobile operators in Africa, where it also operates the M-Pesa mobile money system. Mobile payments are a fast-growing sector in Africa, where much of the population lacks access to conventional banking facilities.
Vodafone’s share price has fallen behind that of BT recently, but one advantage of this is that its dividend yield remains high, at 5.9%. My analysis suggests this payout should remain safe, although new plans to increase spending on network upgrades could put pressure on the payout.
I think that both companies will require patience. But I’d choose Vodafone over BT at current share prices.
