Shares in BT Group (LSE: BT-A) made modest gains after the telecoms giant's results on Thursday, but having taken a closer look at the numbers I think a more cautious view might be wise. While BT remains a solid dividend stock, the firm's growth prospects seem very limited.
Full-year revenue growth was just 2%, after the contribution from the acquisition of EE was excluded. That means BT's revenue only just stayed ahead of inflation last year. What's even more surprising is that this was the firm's best revenue performance for seven years! Since peaking at £21.39bn in 2009, BT's sales have fallen by an average of 2% each year.
In my view, the main risk of investing in BT is that potential growth is very limited. I don't have any serious concerns about the business itself, except that its shares aren't really cheap enough to reflect the likely lack of growth.
BT's adjusted earnings are expected to be broadly flat over the next 18 months. Despite this, the firm's shares trade on a P/E of 14.5 and offer a forecast yield of just 3.1%. In my view this just isn't very good value.
BT's business will always require fairly high levels of capital expenditure. It's also subject to ongoing pressure from the regulator to ensure it doesn't take unfair advantage of its near-monopoly status. I believe there are better buys elsewhere in the FTSE 100.
An identity crisis is hitting profits
While BT has been battling falling sales over the last few years, Marks and Spencer Group (LSE: MKS) has been wondering why fewer women want to buy its clothes. Older readers may recall a time when M&S was a byword for a certain level of style and quality.
Unfortunately this doesn't seem to be true anymore. The firm's clothing sales have been falling for several years. Profits have been supported by strong growth in food sales, as M&S's Simply Food format has proved a big hit with modern shoppers.
Worryingly, the firm's fourth-quarter trading statement suggests that even the food sales growth engine may be slowing. Like-for-like food sales were flat. An overall increase of 4% was due to new food stores being opened. Meanwhile in clothing and home it was business as usual, with like-for-like sales down by 2.7%.
It's not all bad
One of the problems with the group's increased reliance on food sales is that profit margins tend to be lower than on clothing and homewares. According to the firm's interim accounts from November, the gross profit margin in the food business was 32.5%, considerably lower than the 56.6% margin delivered by the clothing and homewares business.
Despite this, Marks and Spencer continues to generate stable profits and good free cash flow. It's certainly not a problem stock, and the current valuation of 12 times forecast earnings may be cheap enough to reflect the risks facing the company.
With a prospective yield of 4.5%, Marks and Spencer is certainly worth considering for income investors.
However, I feel that the group's dated approach to clothing retail and its uncertain identity could be a risk over the longer term. I believe there are better buys -- such as Next -- elsewhere in the retail sector.
Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.