Since peaking at 499p late in November 2015, shares of BT (LSE: BT) have shed nearly 40% of their value and now trade at less than 280p per share. But is this dramatic underperformance compared to the FTSE 100 set to continue?
Well, the bears certainly have plenty of arrows in their quiver suggesting that the stock price won't be soaring upwards any time soon. First off is the Italian accounting scandal that continues to damage the company.
The latest hit came in the form of a £225m payout to shareholders Deutsche Telekom and Orange related to its falling share price in order to forestall legal actions. Settling the payout to its two former telco investors is good news, but with a class action lawsuit in the US moving forward, it may not be the last.
The second, and much larger, issue that's worrying me is the company's push into consumer-facing services. In the quarter to June BT added 18,000 TV subscribers, which is a far cry from the 59,000 added in the same period in 2016. Now, this is still positive momentum and consumer revenue did rise 7% year-on-year to £1.2bn in the period. However, operating costs rose 9% to £1bn in the three months due to payments for sports rights and investments in improving customer service levels.
A third worry looking ahead is Openreach, which in Q1 posted £614m in EBITDA, or more than a third of group total. Although regulator Ofcom decided against requiring BT to divest Openreach entirely in its latest industry review, I fear this is becoming more likely as politicians, consumers and corporations continue to pressure for a completely independent Openreach.
While BT's 5.6% dividend yield and relatively low valuation of 10 times forward earnings will interest many investors, I simply see too many clouds on the horizon to make me comfortable buying its shares.
A more reliable option?
One telco that does interest me is Manx Telecom (LSE: MANX), the largest provider of such services on the Isle of Man. The £220m market cap firm pays out a very traditional telco dividend yield of 5.7% and has a very defensive position in its market.
On top of this attractive income, the company offers decent capital appreciation. One way Manx is pursuing growth is through the traditional method of investing in its offerings and then raising prices. In H1, investments in faster broadband connections led to revenue rising 4% in the division.
In the half year to June, total revenue did fall from £39.2m to £38.5m but this was mostly due to the loss of one contract with a data centre customer and the rest of the business continued to perform well.
This was especially true of the Global Solutions division, which provides SIM cards to tourists that allow them to connect to multiple wireless networks. Revenue from this division rose 13% in H1 and the long-term growth potential is very high. The company expects the effects of an agreement with China Unicom to provide SIM cards for Chinese travellers to begin paying off in H2.
With a killer dividend yield, growth potential and a reasonable valuation of 13 times forward earnings, Manx Telecom looks very attractive to me.
But if Manx Telecom is simply too expensive for you, I recommend reading the Motley Fool's free report on one Top Small Cap trading at only eight times earnings. On top of a bargain valuation this company has also increased earnings by double-digits four years in a row.
To discover this under-the-radar growth and value option for yourself, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Manx Telecom. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.