Why I'd buy 5%+ yielder BT Group plc over recovering Tesco plc


When shares in BT Group(LSE: BT-A) plunged 18% on 24 January investors asked whether this falling knife was worth catching. The answer is now in: nope. The stock bottomed out at 303p that day and has continued to trail down, trading at 276p at time of writing. 

Flashing blade

January's flash crash followed a shock profit warning and estimates that BT's embarrassing Italian accounting scandal could cost £530m, and that was only the start of its troubles. In July, BT reported a 40% drop in first-quarter profits after being forced to pay out £225m to shareholders Deutsche Telekom and Orange following the accounting scandal.

A sharp slowdown in the number of new TV subscribers and rising operating costs due in part to pricier sports rights also hit sentiment. First-half results in November also disappointed, with a decline in sales and profitability.

Good sports

As BT's annus horribilis draws to a close, investors are feeling more optimistic, its stock up 12% in the last month. Investment bank UBS stirred spirits by forecasting a lower pension deficit of £6.5bn against consensus of £11bn-£12bn, while forecasting higher profits for Openreach as well. On Friday, Sky and BT agreed a deal to sell their channels on each other's platforms, which should broaden distribution of BT Sport.

City analysts expect the troubles to linger with earnings per share (EPS) forecast to fall 5% in the year to 31 March 2018, with modest growth of 2% the year after. However, given today's lowly forecast valuation of 9.7 times earnings, BT's future troubles are largely discounted. It is yours for a bargain price. The forecast yield of 5.8%, generously covered 1.8 times, is the strongest reason to buy.

Supermarket sweeps back

Who remembers the glory days at once all-conquering Tesco(LSE: TSCO)? They seem to belong to a different age, pre-financial crisis, pre-Brexit, pre-Aldi/Lidl, pre-everything. The good news is that its 2014 horror show is also fading from memory, with the stock bouncing 44% in the last two years. I'm glad to see investors finally making money from Tesco.

This remains a tough time for the grocery sector with the German discounters rampant, wages stagnant and store margins squeezed. However, Tesco is still by far the largest supermarket, its market share currently 28%, according to Kantar Worldpanel, way ahead of second-placed Sainsbury's at 16.2% (while Aldi and Lidl trail at 6.9% and 5.1% respectively). More than three-quarters of the population shop at Tesco in any 12-week period. 

Fun in store

Tesco also benefitted from the regulatory green light for its £3.7bn takeover of Booker, while latest figures show sales up 2.3% as it balances the need to boost margins against fighting the discounters. Tesco does look pricey at 30.6 times earnings today and of course there is no dividend either, so on this front BT has the edge. I have been bearish on the supermarkets for some time.

However, Tesco's toppy valuation is forecast to drop to 19.4 times earnings in 2018 then a reasonable 15.7 in 2019, as EPS growth hits a bumper 55% and 24% in those two years. BT still has the edge for me because its recovery is at an earlier stage, but Tesco is a tastier treat than I anticipated.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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