Head to Head: G4S vs. Serco

In this series, some of your favorite FTSE 100 (UKX) 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 security giant G4S  (LSE: GFS.L  ) and Serco Group  (LSE: SRP.L  ) , a company with significant security elements to its operations, including involvement with military forces, intelligence agencies, immigration and border security, and prisons.

Serco's shares have matched the FTSE 100 over the past six months, both having risen 4%, while G4S's shares have tumbled 12% in a period that included the company's staffing debacle for the Olympic Games.

Let's take our seats at ringside.

Round 1: earnings




Recent share price 244p 550p
Last year price-to-earnings (P/E) ratio 10.7 13.9
Current year forecast P/E 10.7 13.5
Four-year earnings per share (eps) compound annual growth rate (CAGR) (%) 14 21
Current year forecast eps growth (%) 0 3
Forecast operating margin (%) 4.9 5.5

Source: Digital Look. Winners in bold.

The two companies are closely matched, but Serco edges the first round by taking the final point for its superior operating margin.

Round 2: dividends




Last year dividend yield (%) 3.5 1.5
Current year forecast dividend yield (%) 3.6 1.6
Four-year dividend CAGR (%) 15 19
Current year forecast dividend growth (%) 2 6
Forecast dividend cover 2.6 4.6

Source: Digital Look. Winners in bold.

It's a similar story in round two. Again, the companies are closely matched, and again Serco edges the round by taking the final point: in this case, for more conservative dividend cover.

Round 3: balance sheet




Price-to-book (P/B) ratio 2.2 2.7
Net gearing (%) 120 63

Source: Digital Look. Winners in bold.

The final round ends all square and Serco emerges as the winner of the contest, having won two rounds and drawn one. The overall points tally is Serco with seven and G4S with five.

Post-match assessment
Serco and G4S have delivered strong historic earnings and dividend growth, Serco being particularly strong on these measures. However, analysts' forecasts are for markedly lower growth this year, although Serco again comes out ahead of G4S. It's also notable that Serco has the stronger business fundamentals in terms of operating margin, dividend cover, and gearing.

However, on the question of which stock is the better buy today, it's hard to ignore the fact that G4S took all the points on the five valuation measures I use in these head-to-head articles: historic and forecast P/E, historic and forecast dividend yield, and P/B.

On the face of it, this suggests that G4S might just be better value than Serco at the present time. To some degree, performance will depend on how great a knock-on effect there is to G4S's future contract bids after its Olympics blunder -- and how much Serco benefits. In my experience, though, crises of the species G4S has gone through usually have a surprisingly short-term impact.

At the end of the day, I think G4S's relatively low P/E could be attractive for long-term investors, who are also set to receive a reasonably healthy 3.6% dividend yield while waiting for G4S to get back to business as usual.

Top City investor Neil Woodford -- the man whose funds have outperformed the market by more than 300% over the past 15 years -- holds both companies in his portfolios.

You can learn about Woodford's enormously successful investing strategy and the other dividend-paying blue chips he currently favors in an exclusive Motley Fool report, "8 Shares Held by Britain's Super Investor." The report is free to download right now: simply click here.

G.A. Chester 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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