Should I Sell Vodafone and Buy BT?

LONDON -- Vodafone  (LSE: VOD  ) (NASDAQ: VOD  ) is a blue-chip mobile telecoms titan with a big dividend yield. BT  (LSE: BT-A  ) (NYSE: BT  )  has long been more focused on fixed-line services, but is now providing some exciting new services.

One thing investors don't do often enough is assess investments versus other shares available on the market. If another company has better prospects, shouldn't you consider switching? Instead, we often hold on to the share we have already bought. We are biased toward shares that we already own simply because we already own them. Selling and switching would feel like admitting an error, and no-one likes to do that.

Here, I'm going to compare a share I own (Vodafone) with one that I don't (BT).

Vodafone and BT: head-to-head

Company Price (in pence) P/E (forecast) Yield (forecast, %) Market cap (in millions of pounds)
BT 236 9.5 4.0 18,450
Vodafone 162 10.3 7.3 78,710

Data from Stockopedia.

As a result of some eurozone write-offs, Vodafone profits are expected to fall this year. The shares currently trade at 10.3 times consensus forecasts for this year and just 8.1 times the figure achieved last year.

Profits at BT are expected to fall by a similar amount. Crucially, BT is trading on the lower P/E. Both shares are expected to return to growth next year. Analysts forecast 1% earnings growth at BT and a 4.4% advance at Vodafone.

The Vodafone dividend is a thing of beauty and one of the very largest in the FTSE 100. It's no-contest between the two here. Special dividends from Vodafone's joint venture Verizon Wireless have boosted payments to shareholders to a level that BT holders can only dream of.

Vodafone also has a far superior dividend growth records. The per-share payout at Vodafone is 40.8% higher than it was five years ago. At BT, the 2012 dividend was just 55% of the 2007 payout.

Share price movement
Today, BT shares trade at a three-year high. Vodafone, on the other hand, trades within a whisker of a two-year low. Vodafone is clearly the contrarian pick.

With its November interims, Vodafone reported a planned 1.5 billion pound share buyback. This will reduce the number of shares in issue (boosting my stake in the company) and mean the company can pay higher dividends in the future. There could be another side effect: the buying pressure could force shares in the company temporarily higher.

The winner is...
BT offers some growth opportunities via the roll-out of its pay television operations. However, I believe that BT is taking on a significant risk by moving into a market that Sky has long dominated.

Vodafone shares carry the possibility of a significant short-term gain and the prospect of a long-term high yield. I won't be switching at this price.

If you are interested in using high yield shares like Vodafone to boost your portfolio, then check out what top fund manager Neil Woodford has been buying. Woodford is an income investor par excellence. His investment funds have been thrashing the market for years. To help you learn from this maestro, the Motley Fool has prepared a free report "8 Shares Held By Britain's Super Investor." This details some of Mr Woodford's current favorite shares. Simple click here to start reading today.


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