14th Feb '23 by Roland Head

22 comments 4065 reads

BT and Vodafone both have track records of sluggish growth and high debt levels
Both firms have cut their dividends in recent years, but offer attractive yields today
Both have attracted high-profile major shareholders over the last two years
Is there a clear choice for retail investors today?

BT (LON:BT.A) and Vodafone (LON:VOD) remain two of the most popular FTSE 100 dividend shares with UK retail investors. High dividend yields, seemingly cheap valuations and well-known brands make for an obvious choice.

However, the share prices of both companies have fallen by more than 50% over the last 10 years – a period when even the staid FTSE 100 has managed a near-25% rise. Dividend cuts, falling revenue and uncomfortable debt burdens have all highlighted these firms’ constant struggle to balance low growth with high spending requirements.

In this article I’m going to take a fresh look at both companies following their recent trading updates. Where should investors put their cash today – or should we steer clear of both stocks?

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Let’s recap what each of these groups does. Despite being widely compared, they’re quite different businesses.

BT

BT is the incumbent fixed-line operator in the UK, with by far the largest network. An accelerated upgrade to fibre is underway.

In mobile, BT owns EE, which is said to offer the UK’s best coverage.

Finally, BT offers a wide range of services to business and enterprise customers.

Recent trading: In its recent nine-month trading update, the company said its fibre rollout is now passing 62,000 premises each week. There’s been a 51% year-on-year increase in customer orders for fibre-to-the-premises (FTTP) services.

CEO Philip Jansen believes this investment will generate growth in the future, but the benefits have yet to feed through to BT’s trading performance. Revenue for the nine-month period fell by 1% to £15.6bn, while adjusted EBITDA rose by 3% to £5.9bn.

Here’s how BT’s valuation looks at the moment, based on consensus forecasts:

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The valuation appears to be tempting, but this has been true for many years, suggesting a possible value trap.

Vodafone

Vodafone’s biggest single market is in Germany, where it’s a major broadband and mobile operator. Spain…

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epo001

14th Feb '23

I'd never consciously noticed the tools menu on a stock report and the compare stocks tools looks brilliant.

bohenie

Both these companies have such complex finances I think it makes comparison extremely difficult - but the pension deficit sticks out a mile for BT and the net debt for Vod.

Other factors not mentioned which I would think about - BT spends a fortune on infrastructure for the fibre broadband rollout - VOD does not. Of course that means BT gets the income from companies such as VOD who piggy-back onto the BT infrastructure - but there are annoying companies such as gigaclear (owned by M&G) who are trying to muscle in. It's a mess here in UK. Imagine of you changed electricity supplier and the new company said - ok just a little while while we lay our own cables to your house..!

Finally, probably a good deal the other week for VOD to sell their Egyptian subsidiary - very difficult market there though I'm sure the general public would have preferred VOD to stay put.

raggedtp

It is, I use it frequently. Just remember to look at the factors won correspond to your convictions as to which are most important. For instance, I don't give much weight to market capitalisation, even though it's worth noting.

Thanks for this comparison, Roland. I was just thinking it was time for me to compare the pair (not holding either at the moment). You've set out the key comparators beautifully clearly, and I've set a Buy alert at <90p on Vodafone (LON:VOD) as result. Actually, these are companies that are so big, my size comment below hardly holds. In my book, it means they are the ones to look to trade, rather than invest in. Huge liquidity makes that easy, and every year there is likely to be 20% volatility. I would think this makes Vodafone (LON:VOD) safe to buy at c. 90p, because of the near certainty that it will be bought up to 110p sometime this year. I must renew this discipline , which served me well a few times before the pandemic. As quasi-commodities, they bear less absolute risk than many shares, in my view.

rmillaree

"Dividend cuts, falling revenue and uncomfortable debt burdens have all highlighted these firms’ constant struggle to balance low growth with high spending requirements."

Clearly neither perhaps ! bohenie has hit the nail on the head ref risks.

Why take the risk when others have much less baggage.

BnB

BT vs Vodafone: where should investors put their cash?

Elsewhere.

Aargh Aitch

I've owned both, having inherited them from my Dad and the best thing I can say is that BT had a very attractive looking share certificate! Both now sold and I don't envisage that I will ever regret the decision.

If I had to invest in one on pain of death it'd be Vodafone. They recently sold much of their transmitter "Estate" freeing up some cash. At the time I assumed a sale and leaseback would make them beholden to others. Well, it does but I've since come across a Warren Buffet letter (1983), detailing how tangible asset heavy businesses suffer in inflationary environments, it has changed my perspective on investing. I've yet to implement it in my investment strategy but I no longer see flogging their towers as being such a big de-merit.

Should we consider pricing power too? I assume BT's ability to raise prices is capped, as they are considered a utility but I don't see a mobile operator in the same light; this may be a generational thing. I haven't checked if Vodafone's tariff is regulated in any of their markets, it wouldn't have affected my sell decision but if you could find a mobile business with uncapped tariffs, with an expanding share of an expanding market I'd sit up and listen.

Didn't Megan make a recent point about the attractiveness of British businesses with overseas markets being less exposed to the relentless fall of our sacred Pound? This favours Vodafone more than BT.

Finally BT has a lot of domestic subscribers who are legacy customers. They plan a wholesale move away from copper wire to voice-over-internet for 2025. People who aren't interested in internet are going to have to get a broadband contract if they want to keep their landline, this wholesale move to new tariffs will probably be the spur many people need to review what they get for their money and potentially jump ship.

I missed a T of Buffet, this annoys me more than if I'd spelled Vodafon.

And I did it again! Buffett.

Boon

The problem with the UK markets (and also European) is that the regulators have been too customer-friendly, and thus all infrastructure owning companies (BT and VOD are) need to open up their infrastructure to virtual networks.

That is why in the UK, and many European countries, you have dozens of Mobile and Broadband brands. They get access to the actual networks because regulators have mandated cheap wholesale access prices, to spur competition.

Anytime you have lots of competition in a market, margins get squeezed. You only have to look at the Broadband and Mobile plan prices in the UK, consistently getting lower. It used to be that you had to pay £2/month for 1GB of data just a few years ago. Now you can get like 10GB for a few £s for a mobile sim only deal. It is a race to the bottom.

In a race to the bottom, the company with the leanest cost structure wins. Unfortunately, neither BT nor Vodafone can be considered that. As big incumbants in the Broadband and Mobile markets, they are either bleeding customers migrating to cheaper virtual providers, or they are having to renew contracts on cheaper prices.

Their equivalent would be the newspaper and magazine groups listed on the LSE. Not too dissimilar - declining revenues, big debt/pensions. What PE are you willing to pay for this?

Norfolk Sceptic

17th Feb '23

But Vodaphone? Surely, never! :)

Jeremy Philips

Overall I agree and find this v useful.The fact is if I was not invested in them with a 50% share value loss I would not touch either of them on today’s figures. It is going to be a long haul back.

MiserableJacktPotato

18th Feb '23

I work in IT for a large consultancy, we've got engagements with two major customers who use both these companys to provide telephony. Basically, from working with them, and seeing the way the corporate market is changing for telephony services, I wouldn't touch either of these, telephony is dying as the big IT companies take over. You can do pretty much everything through your ISP.

littledavesab

19th Feb '23

For me both businesses seem to be on a journey from profitable market dominant type firms (OK more true for BT) to being legacy operators in a ever increasingly competitive marketplace.

The pace of technology suggests that competition will intensify. Given time, both may come under pressure from Starlink which a quick look tells me can already offer Worldwide incl rural locations broadband coverage at $110/mo with a one-time hardware cost of $599. That is before it even tries to compete on price.

On the other hand technology can give the chance to create new businesses/revenue streams. Maybe it will come down to who can make the best use of new opportunities and tech rather than the legacy systems? Both down, not looking great, but not out as yet.

aflash

Since Dec these stocks have risen by between 22% and 25%.

No friends on Stockopedia then nor now, somebody likes them.

https://www.stockopedia.com/co...

Demand has outstripped supply so VOD can go at breakeven. I shall be sorry to sell a core holding that has produced 5% income over many years of negative interest rates.

Anthony Beater

21st Feb '23

I have held shares in both these companies in the past, so I have found these comparisons extremely interesting. From the early dotcom revolution Vodafone promised so much but has often disappointed. Thank you, Roland for such a well balanced report on the strengths and weaknesses of both these giants. I agree that Vodafone probably would be a sounder prospect for an investor - mainly because the African connection could well have further prospects for development.

Rusty2

6th Mar '23

Just had an email from BT, my broadband is going up over 14%, ouch. Must be good for BT (LON:BT.A), are rivals increasing their fees by similar amounts?

ezlifeme

7th Mar '23

Yep - Most are going up 3 to 4% above retail inflation

OK, lets hope the shares go up as much, then I can sell them.

Sukhbirkapoor

5th Jun

This is a great article. Can we please review this to see how things have progressed ? Thank you

BT vs Vodafone: where should investors put their cash?

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Roland Head

22 comments

BT vs Vodafone: where should investors put their cash?

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