Head to Head: Vodafone vs. BT

LONDON -- In this series, some of your favorite FTSE 100 shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are telecoms giants Vodafone Group (LSE: VOD.L  ) and BT Group (LSE: BT-A.L  ) .

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- including the utility-like telecoms groups.

The shares of Vodafone and BT have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 2%, but Vodafone is up 9% and BT has risen 2%.

Let's take our seats at ringside.

Round 1: earnings

 

Vodafone

BT

Recent share price (pence) 184 220
Last year price-to-earnings (P/E) ratio 12.3 9.3
Current year forecast P/E 11.5 8.8
Four-year average earnings per share (EPS) growth (%) 6 2
Current year forecast EPS growth (%) 8 5
Forecast operating margin (%) 23 14

Source: Digital Look. Winner in bold.

Vodafone takes the first round by a narrow margin, winning points on EPS growth and operating margin, while BT wins points for its "value" P/E rating.

It's worth noting that BT's historic EPS growth is dragged down by a terrible performance in 2008-09 when earnings fell by 33%. In the three years since, the company has delivered far more respectable 11% average annual growth -- which is ahead of Vodafone's.

Round 2: dividends

 

Vodafone

BT

Last year dividend yield (%) 5.2 3.8
Current year forecast dividend yield (%) 5.5 4.3
Four-year average dividend growth (%) 6 -8
Current year forecast dividend growth (%) 7 14
Forecast dividend cover 1.6 2.6

Source: Digital Look. Winner in bold.

Again, Vodafone comes out on top in a closely fought round. Vodafone's dividend yield is particularly strong and the true income return for shareholders is understated in the table. The company paid a special dividend last year as a result of its 45% stake in U.S. firm Verizon Wireless. Analysts are expecting another special this year, which will push the yield up to 7%.

BT's historic dividend growth suffers like its earnings growth from that awful performance in 2008-09. Again, like the earnings, the dividend performance has been much better in the three years since. BT has delivered average annual growth of 9% -- once more, ahead of Vodafone's.

Round 3: balance sheet

 

Vodafone

BT

Price/Book (P/B) 1.2 13.2
Net gearing (%) 36 783

Source: Digital Look. Winner in bold.

Vodafone hammers BT in the final round, resulting in a three rounds to nil win and a score of eight points to BT's four.

Post-match assessment
On the face of it, this was a comfortable win for Vodafone. A superb yield, earnings and dividend growth respectably ahead of inflation, and a good operating margin and balance sheet strength, are the hallmarks of a strong, mature company.

But let's not be too quick to write off BT entirely. If you forgave the company its wayward 2008-09 performance and judged it on the three years since, it would score rather more highly.

While Vodafone's high yield is a big draw for income seekers, BT's yield isn't bad and the dividend is well covered. Furthermore, BT's "recovery" potential could interest investors looking for the added bonus of a rerating of the shares from their current low P/E if the company continues its recent progress.

Are Vodafone or BT among the shares favored by top City investor Neil Woodford, the man whose funds have outperformed the market by more than 300% over the past 15 years?

Discover the answer to that question -- and a whole lot more about Woodford's enormously successful investing strategy -- in an exclusive Motley Fool report, "8 Shares Held By Britain's Super Investor". The report is free to download right now, simply by clicking here.

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G A Chester owns does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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