Which is better value, the BT or Vodafone share price?

I’ve found the both the Vodafone and the BT share price to be frustrating over the years. Today, I put the two telecoms giants head to head.

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Investors seem to have had a love/hate relationship with our big UK telecoms stocks over the years. But with the BT Group (LSE: BT.A) share price down 44% in five years, it might be good value now.

The Vodafone (LSE: VOD) share price is down even more, with a 60% crunch in the same time. Might that also be better value now?

Created with Highcharts 11.4.3Bt Group Plc + Vodafone Group Public PriceZoom1M3M6MYTD1Y5Y10YALL0www.fool.co.uk

Things in common

The two have a few things in common, and not just phones. They both face big capital expenditure each year to develop each new generation of telecoms technology. And I don’t see that changing any time soon.

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They also both have a record of paying out cash. After the BT share price slide, the forecast dividend yield for 2023 stands at 6.1%.

At Vodafone, we’re looking at an unlikely 10.4% yield. Unlikely? I’ll come back to that.

They both seem to be on modest price-to-earnings (P/E) ratios too.

Value comparison

Here’s a look at a few key measures from the two firms:

CompanyBT GroupVodafone
Recent share price122p71p
1-year change-30%-45%
5-year change-44%-60%
P/E ratio8.311.9
Adjusted P/E2129
Dividend yield6.1%10.7%
Net debt£18.9bn£28.7bn
Market cap£12.3bn£19.6bn
(P/E ratios and dividend yields are forecasts)

Look at those share price falls! I think they’re in part due to paying big dividends while building huge debt. That can often harm long-term value.

Adjusted P/E

What’s that adjusted P/E all about? The headline P/E can look fine, but it hides the effect that debt can have on the value of a stock.

So I add each firm’s net debt to its market-cap, which gives the cash it would take to buy the whole company and pay off its debt.

I then work out a new P/E based on that, which I think better shows the value of the business. It’s called an enterprise value P/E, and I think we should use it more often.

Those adjusted P/E ratios don’t look so good now, do they?

Vodafone dividend

So the Vodafone dividend looks unlikely? Well, forecast earnings don’t cover it, while BT’s dividend is twice covered by earnings.

At FY results time, Vodafone’s new boss Margherita Della Valle said: “Our performance has not been good enough. To consistently deliver, Vodafone must change.”

Will that change the firm’s policy on dividends and debt? I hope so, because I think it needs to.

It might even be a whole new start for Vodafone. I do think it has a good long-term outlook if it can firm up its finances.

Which is best?

I think Vodafone’s medium-term financial future is very uncertain. And I don’t see a safety buffer in its valuation to cover that.

I reckon BT has some of the same issues too. It does look a bit better value though. And I see less risk of a dividend cut. So if I had to pick, I’d go for BT. I’m not too thrilled by either right now though.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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