Why I think the BT share price is a better buy than Vodafone on 7.9% dividends

Virgin’s defection to Vodafone stung the BT share price, but I say it’s an overreaction given the value BT is offering. Watch closely.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The BT (LSE:BT.A) share price has bounced back from the doldrums, and despite some shock news recently, I think it still makes a good investment case for income investors.

Virgin announced on 6 November its was moving its mobile operations over to rival Vodafone (LSE:VOD).

Cable broadband specialist Virgin doesn’t have its own mobile infrastructure and so must piggyback on a network; first on EE and now Vodafone. The £200m contract switch was apparently made on cost grounds, taking 3 million Virgin customers off BT’s books.

Still, I say BT is attractive because its share price is at multi-year lows. A headline dividend of 7.9%, and a trailing price-to-earnings ratio of 7.5 means it is super cheap, too. But is Vodafone the better bargain?

5G all the way

Since BT’s £12.5bn buyout of EE in 2016 the mobile network has dominated every category in data speed, coverage, and reliability with 4G and 4G+.

But since the UK regulator Ofcom’s 5G spectrum auction, Vodafone has come into its own. In the second half of 2019 data analyst Rootmetrics, which charts speed and reliability city-to-city, found Vodafone 5G faster and more reliable than long-time king of the hill EE.

Vodafone debt hangs heavy

There’s been talk of a takeover or merger between Virgin and Vodafone’s UK businesses for years. They certainly have close ties in Europe. Virgin’s owner Liberty Global owns half of Vodafone’s Dutch mobile and broadband service and in 2019 sold almost a third of its assets to Vodafone in a €18.4bn deal, giving it 25 million new customers across Germany, Hungary, Romania, and the Czech Republic.

But Vodafone financed the deal with massive amounts of debt. And that’s what led bosses to dismiss 20 years of history with a 40% dividend cut in May 2019.

I think investors should be concerned about the forward pressure this puts on Vodafone’s balance sheet even as group CEO Nick Read says his focus is on “reducing our financial leverage towards the lower end of our targeted 2.5–3.0 times range“.

Vodafone’s price-to-earnings ratio is now in minus numbers. It swung to a €2.61bn loss in 31 March 2019 results, from €43bn in revenue. Half-year results are out on 12 November.

BT free

The telecoms behemoth is a classic recovery bid. Buying an out-of-favour stock when the herd is heading in the opposite direction takes some gumption and fortitude but you will be smiling if it pays off.

Both bargain hunters and income investors have something to gain from BT, in my opinion. The share price rebounded 15% from 160p in August and now hovers around the mid-190p mark. I think there’s more upside in the BT share price than Vodafone, simply because prices are so low.

And losing Virgin’s £200m contract after 20 years – as much as it stings and makes headlines – is still a drop in the ocean on half-year revenues of £11.4bn, reported on 31 October.

As income investors, more than anything we want more our dividends every year like clockwork. BT have said that investing in their network will take precedence over sky-high dividends. I think that’s the right strategy.

The contract loss will make BT’s dividend coverage tighter, City analysts say, which means that money may not come back to shareholders. I would price in a possible dividend cut from BT if you’re looking to load up on the shares.

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.

Tom has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »