Should I Buy Vodafone Group or BAE Systems?

LONDON -- BAE Systems  (LSE: BA  ) (NASDAQOTH: BAESY  ) and Vodafone Group  (LSE: VOD  ) (NASDAQ: VOD  )  operate in completely separate industries, but both companies have an attractive track record of providing high dividend yields.

The two firms also have another similarity -- both depend quite heavily on the substantial income they receive from their American businesses, without which they might struggle to fund their coveted dividend payouts.

I own both shares myself, but am looking top up some of my holdings -- so which of these two high yielders looks the best buy today?

Vodafone vs. BAE Systems
I'm going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their most recent annual results:

  Vodafone BAE Systems
Price to earnings ratio 14.2 11.7
Dividend yield 6.9%
(4.9% without special dividend)
5.1%
5-year average dividend growth rate 7.1% 8.8%
Net gearing 32% -10% (net cash)

Vodafone plunged into a loss in the first half of this year, thanks to a hefty 5.9 billion pounds impairment on the value of its operations in Spain and Italy.

However, the firm's underlying operations remain profitable, and Vodafone was able to pay a four pence per share special dividend last year, on top of its standard dividend, giving shareholders a bumper payout that would give a yield of 6.9% at today's 195 pence share price.

Excluding these special dividends, both companies have similar historic yields, and BAE's dividend has grown faster than Vodafone's over the last five years. The defence company is also cheaper on a P/E basis, and benefits from having net cash of 387 million pounds, thanks to strong cash inflows last year.

What's next?
Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let's take a look at the latest 2013 forecasts for Vodafone and BAE Systems:

  Vodafone BAE Systems
Forecast P/E ratio 12.7 9.1
Forecast dividend yield 5.4% 5.3%
Forecast dividend growth 10.6% 4%
Forecast earnings growth 7.5% 23.2%

A Vodafone special dividend seems unlikely this year, because the firm has said that it will use the majority of the money from the 2.4 billion pounds from the Verizon Wireless dividend it received late last year to fund a share buyback.

BAE continues to look cheaper than Vodafone on a forward P/E basis, and analysts expect stronger adjusted earnings growth from the defence firm, too.

Which share should I buy?
Both Vodafone and BAE have been the subject of recent merger stories, but while BAE's failed merger with Airbus manufacturer EADS is now a closed book, Vodafone's situation is much less certain.

It seems increasingly likely that Vodafone will negotiate some kind of deal to sell its 45% stake in Verizon Wireless to its parent firm Verizon. Although this would provide a windfall for Vodafone, Verizon Wireless is the most profitable part of its business, creating some uncertainty as to how well it would fare without its U.S. arm.

Both firms offer similar dividend yields, but Vodafone's price has been pushed up by the recent bid speculation. Today, I would rather take advantage of BAE's low price and cash-rich status, and top up my holding in the U.K.'s largest defence company.

The best FTSE 100 dividends?
BAE and Vodafone are both decent income buys, but there are a number of other attractive, high-yielding alternatives elsewhere in the FTSE 100

Indeed, I can tell you that neither of these companies were chosen by The Motley Fool's team of analysts for their latest special report, "5 Shares To Retire On."

If you would like to know the identity of these five top-rated dividend investments, click here now to download your copy of this report. It's free, but availability is strictly limited, so don't delay.


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