Should I Buy BT Group or J Sainsbury?

LONDON -- The FTSE 100 is the U.K.'s blue-chip stock index, but surprisingly few of these companies earn the majority of their profits in the U.K.

Two companies that do are BT Group  (LSE: BT-A  ) (NYSE: BT  ) and J Sainsbury  (LSE: SBRY  ) (NASDAQOTH: JSAIY  ) .

Both shares offer the potential for rising earnings and dividends over the medium term, but which of these two household names would be the better buy for my portfolio?

BT vs. Sainsbury
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 results from the last 12 months:

 Metric

BT Group

J Sainsbury

Price-to-earnings ratio

11.1

13.0

Dividend yield

3.1%

4.3%

5-year avg dividend growth

(11.3%)

10.6%

5-year avg EPS growth

(6.2%)

10.8%

Based on these figures, Sainsbury looks like a far more reliable and consistent performer, with a five-year history of solid earnings and dividend growth.

Sainsbury's 4.3% trailing dividend yield is also superior to BT's 3.1% yield, which is no better than the FTSE 100 average -- but far more risky, since it comes from a single share.

However, it is worth remembering that BT's management has plans to increase the pace of dividend growth, and this year's interim payout was 15% higher than last year's.

What's next?
Although Sainsbury's track record over the last five years is better than BT's, I'm not sure whether the supermarket's growth can continue at this rate, especially if Tesco's turnaround plan starts to deliver.

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 some forward-looking numbers for BT and Sainsbury. These apply to the companies' 2012/13 financial years:

 Metric

BT Group

J Sainsbury

Forecast P/E ratio

11.5

12.8

Forecast dividend yield

3.4%

4.4%

Forecast dividend growth

14.4%

4.3%

Forecast adj. earnings growth

(13.9%)

6.4%

BT's adjusted earnings are expected to dip this year, before rising gradually again next year. The firm is struggling to deal with falling revenues, while also investing heavily in network upgrades and its forthcoming television service.

In contrast, Sainsbury is expected to deliver steady earnings growth and a dividend increase that should stay above inflation, boosting its prospective dividend yield to 4.4%.

Which share should I buy?
Sainsbury's steady earnings and dividend growth and its above-average dividend yield look appealing to me. Although the supermarket's shares aren't quite as cheap as they were, their yield makes the price worthwhile, in my opinion.

I'm less keen on BT, as I believe the firm's recovery is still uncertain and its profits -- and dividend payout -- remain substantially lower than they were in 2007. If you're interested in BT, then it might be worth waiting until its full-year results are published on May 10. I will certainly be taking a close look at them.

The best FTSE 100 dividends?
Sainsbury is a tempting income buy, but there are a number of other attractive, high-yielding alternatives elsewhere in the FTSE 100 you may also want to consider.

Indeed, I can tell you that Sainsbury's wasn't chosen by The Motley Fool's team of analysts for its 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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