Why You Need To Take Another Look At Vodafone Group plc And British American Tobacco plc

It’s usually a pretty straight-forward decision: am I going to chase capital gains, or dividends?

For those with quite a bit of cash, and time to look at the market, trading can prove quite lucrative. If you’re in for the long haul, on the other hand, and you would prefer to throw your money behind solid companies that’ll provide you with passive income for later in life, then a dividend portfolio is what you want.

Recently, though, the market has made that decision a little more tricky. For starters, unless you’re trading full-time, it’s very hard to know where the next growth stock is going to come from; and secondly, companies have thrown a spanner in the works by boosting their dividends unexpectedly.

Vodafone to blame

The returns on the FTSE 100 over the past 12 months have been anything but inspiring. The previous year was a different story when the market produced gains of over 13%. The year 2014 though was basically flat. FTSE 100 companies have struggled for profit growth, not helped at all by a sluggish global economy.

Rather than chasing growth, some companies have downsized (sold assets) and used the cash for dividend payouts. In fact, according to The Telegraph, British companies paid out a record £97.4 billion in dividends to investors last year. Guess which company was front and centre? Vodafone (LSE: VOD) (NASDAQ: VOD.US). The telecoms player was the single biggest dividend payer, returning £20 billion to shareholders. Much of that was due to special payments of £15.9 billion.

Is Vodafone onto something here? Its main rival, BT Group, produced a dividend yield of only 2.7%. Over the same period, Vodafone yielded 4.6%.

Strategically, BT trumped Vodafone in 2014 by moving forward with its bundled offerings. It became obvious that Vodafone was playing catch-up. Perhaps that means that BT will offer better earnings growth than Vodafone in coming years? In the meantime, it seems Vodafone has claimed victory on the dividend front — a front that companies may now need to take more seriously as investors look for returns.

The pound adding to problems

Another issue many FTSE 100 companies are taking more seriously is the strength of the pound. Last year saw the pound rise 10% against the euro. In the nine months to the end of September, British American Tobacco (LSE: BATS) (NYSE: BTI.US)’s revenue fell 9.6%.

The pound is currently at a seven-year high against the euro so for those earning money in Europe, it’s going to hurt (notwithstanding various hedging policies in place). British American Tobacco is just one company to be affected. Compass Group, Rolls-Royce Holding and Diageo are also on the currency hit list.

With the European Central Bank’s recent decision to engage in quantitative easing, this currency problem faced by British multinationals is unlikely to go away any time soon. In addition, analysts are worried that slowing global demand is also hurting British companies stretched out across the world. British American Tobacco has again been singled out because cigarettes are now been seen as a ‘luxury’ in poorer countries.

Is it time to favour domestically focused stocks?

The problem with favouring British-centric companies over multi-nationals with exposure to fluctuations in the pound is that the British economy isn’t going gang-busters either! Yes, the services sector is growing, but the rest of the economy already looks a bit tired. To this Fool, the answer seems to be a compromise. It doesn’t make sense to chase companies over-exposed to discretionary spending in Britain, nor to companies that are leveraged towards growth in the Eurozone. It does, however, make sense — from a short-term growth perspective — to chase companies with operations in the United States. You’ll find, too, that the pound is indeed on the back foot in that particular currency pair.