Why Vodafone Group Plc Beats BT Group Plc

The Motley Fool

Over the coming weeks, I'll be taking a look at the biggest and best companies in the various FTSE 100 sectors. Today it's telecoms, and that means just two big players -- Vodafone (LSE: VOD) (NASDAQ: VOD.US) and BT Group (LSE: BT-A) (NYSE: BT.US).

Here's a quick summary of some fundamentals:

Vodafone

Year to March

EPS

P/E

Dividend

Yield

Cover

2008

12.56p

12

7.51p

5.0%

1.7x

2009

17.17p

7.1

7.77p

6.3%

2.2x

2010

16.11p

9.4

8.31p

5.5%

1.9x

2011

16.75p

10.5

8.9p

5.0%

1.9x

2012

14.91p

11.5

9.52p

5.5%

1.6x

2013 (f)

15.18p

12.3

10.35p

5.5%

1.5x

2014 (f)

16.50p

11.3

10.82p

5.8%

1.5x

2015 (f)

17.52p

10.6

11.08p

5.9%

1.6x

That steadily rising dividend is nice, and the consistently high yield suggests the share price has not kept pace with the true valuation of the company.

High dividends aren't guaranteed, and a company might have to cut its payout if earnings are not sufficient. And to that end, it's perhaps a little concerning that Vodafone's dividend cover has fallen a little. But forecasts suggest it is stabilising.

BT

Year to March

EPS

P/E

Dividend

Yield

Cover

2008

23.90p

9.1

15.8p

7.3%

1.5x

2009

16.00p

4.9

6.50p

8.3%

2.5x

2010

17.30p

7.2

6.90p

5.6%

2.5x

2011

21.00p

8.8

7.40p

4.0%

2.8x

2012

23.70p

9.6

8.30p

3.7%

2.9x

2013 (f)

24.95p

11.2

9.43p

3.4%

2.6x

2014 (f)

25.34p

11.0

10.67p

3.8%

2.4x

2015 (f)

27.01p

10.3

12.09p

4.4%

2.2x

BT has been recovering well since 2009, but though it is growing earnings quite nicely, dividend yields have been falling.

Which is best?

BT's third-quarter figures saw revenues fall by 6%, and some of that is because BT is mainly dependent on just one market -- around three quarters of its business is done in the UK, where competition is strong and saturation levels are high.

Vodafone, on the other hand, gets only around 12% of its turnover from the UK, has a good presence in the developing market of India, and holds a 45% stake in Verizon Wireless in the US.

About 10% of BT's turnover comes from Europe (excepting the UK), whereas Vodafone gets close to 60% of its revenues from the wider eurozone area. That greater international clout helps Vodafone in capturing multinational contracts -- like the recent deal to supply Germany's ThyssenKrupp, and a new partnership with Poland's Polkomtel.

Elephants

There are elephants in both these rooms. For BT, it's that massive pension fund, which is going be a millstone round the company's neck for decades -- in fact, BT is often described as a pension fund manager that has an interest in phones on the side. The worst days of the deficit during the stock market slump are behind us -- but what will happen in the next bear market when assets values fall again?

For Vodafone, we have the repeatedly raised and denied rumours of a merger or a takeover with or by some combination of Verizon Communications and AT&T -- or maybe a buyout of its stake in Verizon Wireless.

The big difference is that if Vodafone's elephant comes home to, erm, roost, it would almost certainly be at a nice price for shareholders.

Vodafone is my pick of the sector -- and if you do your own research, you might agree.

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