Which Is Best For 2016, BT Group plc, Vodafone Group plc, SKY PLC Or Talktalk Telecom Group PLC?
While everyone has been panicking about falling oil prices and running scared from the FTSE 100, the telecoms sector has been overlooked -- yet some of its top companies have been doing well.
Shares in BT Group(LSE: BT-A) are up only a modest 6% in the past 12 months, to 469p, but over five years they've rewarded investors with a 158% rise -- with dividend yields of around the 3% level thrown in as a bonus. It comes after several years of solid rises in earnings per share, and though there's a small EPS fall on the cards for this year due to the firm's rights issue in 2015, growth is expected to resume in the year to March 2017.
BT's acquisition of EE puts it firmly at the head of the UK telecoms sector, and though its dividend isn't one of the highest around, it's progressive and is surely one of the safest in the FTSE. A prospective P/E of 14.2 looks cheap to me.
I'm less impressed by Vodafone(LSE: VOD) and its very high P/E of 45 based on March 2016 full-year expectations, dropping only as far as 38 on 2017 forecasts. The shares are down 3.6% over 12 months to 216p, and up only 19% in five years, after two years of rapidly dropping earnings due to the fall-off in plain old voice calls and the massive reinvestment in Vodafone's next generation data networks in Europe.
Vodafone shares look priced possibly for a takeover bid, and rumours of a merger with Liberty Global are surfacing again after the two announced a joint venture in the Netherlands. But if that's not behind the high share price, then there's an awful lot of growth built into it today -- there's surely growth to come, but it seems too uncertain to me to justify such a lofty P/E.
And the very high 5.3% dividend yield doesn't impress me, as it's only around 40% covered by earnings.
If we turn to Sky(LSE: SKY) we see a 9% price rise in a year, to 1,021p, though only a fairly modest 30% in five years. Despite that, and after a couple of years of stagnating earnings, Sky shares are on a forward P/E of 16. That's only a little ahead of BT's, and its dividend yields are on a par.
In its recent interim results, Sky reported continued growth in customer numbers across its product offerings -- it now has 21.5m customers and is expanding across European countries too. Though BT did well to grab control of a wedge of Premier League football rights, Sky remains the nation's favourite supplier of pay TV.
Data breach forgotten?
Then we come to TalkTalk Telecom(LSE: TALK), and a 50% share price fall since June 2015, to 204p. Much of that was down to the embarrassing security breach it suffered last year, so could we be looking at an oversold bargain now?
Forecast EPS growth of 50% this year and 44% next would drop the 2017 P/E to 11.5, and provide a PEG ratio of just 0.3 -- and that's a very strong growth indicator. But the big concern is the very high predicted dividend yields of 6.8% and 6.3% respectively, because the earnings just aren't there to cover them -- this year's would be uncovered, with next's covered only 1.2 times.
My choice? I think the whole sector has great prospects, but my pick would be broadband leader BT, with Sky in second place -- and with TalkTalk as an outside bet.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.