Better buy: BP plc vs BT Group plc

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BP

It's hard to determine BP's (LSE: BP) growth potential for now as its fate is so closely tied to the relatively crystal ball-proof movement in oil prices. But the very long-term outlook for oil prices is looking increasingly poor as cheap oil from shale producers and what's looking like a secular decline in demand growth for fossil fuels crimps the financial outlook for globe-spanning oil majors.

On the other hand BT(LSE: BT.A) has fairly reliable growth prospects in the medium term as it aggressively moves into the consumer-facing market for pay-TV, mobile, broadband and fixed line phone services. But I also have my doubts about this strategy over the long-term as the price for content rises (BT has paid over £1bn for football rights alone in the past few years) and competition heats up with Vodafone throwing its hat into the ring alongside rivals such as Sky.

And BT has to worry about the potential for regulator Ofcom to force it to divest Openreach, its subsidiary that controls the vast majority of broadband and fixed line pipes in the country. Should that happen BT would lose the division that provided more than 33% of EBITDA and 60% of free cash flow in the past quarter.

Both companies are facing significant external headwinds, which makes this category a toss-up. Risk-averse investors will likely prefer BT while those investors like me who have a higher risk tolerance will likely find BP has greater upside potential in the next few years.

Dividends

BP leads off strongly in this category with shares that currently offer a whopping 7% yield. There are problems lurking just beneath the surface though as falling earnings left shareholder payouts uncovered for three years running and debt rose to £35bn in Q4. On the upside, management is committed to maintaining payouts and cost-cutting and big downstream assets meant operations kicked off $4.5bn in net cash in Q4, if you exclude payments related to the Gulf of Mexico spill.

BT shares meanwhile offer a lower but still impressive 4.62% dividend yield. But there are problems here as well as high investments in the consumer-facing bet, debt repayments and the big dividend consumed more cash than BT generated from operations last year. This isn't a critical problem just yet but is something prospective investors should keep their eye on in the coming years.

Rising debt is a problem at both companies but the killer dividend yield on offer from BP alongside rising earnings wins it in this category.

Valuation

At 15 times forward earnings analysts aren't baking much future growth into share prices of BP. This may be a wise move though as it looks as if crude has found a price ceiling, at least for the time being, at around $55/bbl. But if something drastic occurs and oil prices rise this could mean significant upwards rerating for the company's shares.

Considering the problems surrounding the company, BT shares don't look like a screaming bargain to me at 11 times forward earnings, especially since analysts are pencilling-in a 16% fall in earnings per share next year. With underlying growth in the mid single digits and a sweeping review of the company under way that could reveal more problems, I'm wary.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.