How low can BT Group plc and Sky plc go?

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Over the four years to the beginning of 2016, shares in Sky(LSE: SKY) and BT(LSE: BT-A) were some of the FTSE 100's most attractive investments. 

The defensive nature of these two companies, coupled with their market-leading dividend payouts and earnings growth, made the shares highly attractive to investors. Between year-end 2012 and 2015, shares in Sky and BT rose 48% and 135% respectively. 

However, this year the market has turned its back on these two companies. Over the past 12 months, shares in Sky and BT have lost 31% and 29% respectively, wiping out several years of gains. Indeed, over the past five years, shares in Sky are now up by only 6.2% excluding dividends. 

The question is, what's behind these declines and how much lower can the shares fall before BT and Sky become attractive again? 

Competition concerns 

Ultimately, any stock can fall to zero so shares in Sky and BT can fall a lot further if their revenues evaporate overnight. However, it is extremely unlikely this will happen in the near term. 

Still, it is clear investors believe there is something wrong with these two companies, or they wouldn't be dumping the shares. For Sky, it seems that the market is concerned about the impact the rise of online streaming will have on the company. 

These are not new concerns. Ever since the emergence of streaming sites such as Netflix and Amazon, investors have been worried about Sky's prospects. Nonetheless, the company has continued to expand its reach, engagement with customers, and increase revenue and profits over the past five years despite the presence of these disruptors -- and there's little evidence to suggest that this trend will change any time soon. 

That being said,  the one area where it's clear Sky is struggling is sport. 

Last year, the Premier League secured a £5.1bn broadcasting deal with Sky and BTSport for the next three seasons, an increase of £600m year-on-year. However, this purchase price has been difficult to justify. TV viewership for live Premier League games on Sky fell 12% year-on-year during the first ten weeks of the season.

So, it's clear customers are changing their sports-viewing habits. Clearly, this trend won't just affect Sky -- BT is also at risk.

Charting a course 

It would appear that Sky is taking the right course in navigating the market. As Sky reported 13% revenue growth for the first quarter of its financial year, BT reported revenue growth of 1.1% adjusted for the acquisition of mobile operator EE. Sky added 100,000 new TV subscribers across the group, while BT only added 65,000. 

Still, for the time being, it looks as if both BT and Sky are managing to navigate the increasingly competitive TV content market. Until managements can reassure investors that this trend won't come to an end any time soon, it's likely the shares will continue to slide, which could offer a great opportunity to long-term Foolish investors.

After recent declines, shares in Sky and BT both look cheap and offer attractive dividend yields. Specifically, shares in BT currently trade at a forward P/E of 11.9 and yield 4.3% while shares in Sky yield 4.3% and trade at a forward P/E of 13.5. 

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Rupert Hargreaves owns shares of Sky. 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.


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