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Business Comment

Investment Column: Vodafone is buzzing but BT is still risky

Vodafone: Buy

BT: Avoid

Vodafone has been a frothy stock of late, although some of that has been blown off the top recently. Now it's on the acquisition warpath, with Kabel Deutschland in its sights. What's an investor to do?

There has been speculation over what Vodafone might do with its stake in its joint venture US business Verizon Wireless. The answer is not much at the moment, and it doesn't exactly need to. The operation, which accounts for more than half Vodafone's market value, is highly profitable, and throws off cash like a tycoon in a casino. A divvy of £2.1bn is heading the company's way.

Selling out to its partner would generate a huge amount of cash, and a juicy special dividend could follow. Longer-term investors might think, however, that sitting pretty isn't the worst thing in the world, given that the money being released so regularly from the operation can fund the investment in new markets that Vodafone needs.

Outside Verizon, things have been less pretty. European revenues have been on the skids as a result of the Continent's ongoing economic crisis, but the guidance from management has been reassuring, and margins have held up. The intriguing recent news is the bid for Germany's biggest cable TV company, which would open up a new market in the one part of Europe you'd really want to be in, and looks very interesting from a strategic perspective. Vodafone is paying top dollar (although cost savings mitigate the premium) but there's a lot to like about a deal which sees the company opening a new frontier.

Elsewhere it's a mixed bag, as ever. But Vodafone still has a lot going for it as an investment. The company was one of our 10 to follow this year, and it has done delightfully well for our new year feature, which continues consistently to beat the market.

The shares were tipped then at 154.45p, and they remain solidly ahead. They trade on about 11.5 times earnings right now, with a very attractive forecast yield of 5.5 per cent. And there's nothing like BT's pension issue weighing on the stock.

Controversy has circled the company over its tax affairs, and that is worth bearing in mind for those who consider corporate ethics (as I do).

Vodafone argues that it has been unfairly treated, although like any multinational it does its best to keep tax to a minimum, and you can bet it hires expensive accountants to make use of every available facility.

Looked at in the round, while Vodafone has some work to do, I still maintain that even now it's not expensive by any means. As a result, I continue to recommend a buy.

As for the aforementioned BT, is it just me or does the fact that so many companies want to remove the "British" from their name indicate we have a branding problem as a nation? BG, BAE Systems, BP, BT; spot the trend?

BT used to be British Telecom, and a bad experience as a customer, admittedly some years ago, has meant I've never had much love for it. So I missed a trick when I said sell at 224.9p. That's been as bad a tip as my consistent "buy" on Vodafone has been a winner.

My rationale was simple: BT has been shrinking in terms of revenues, although that should soon come to an end. And it's fair to say the results last month were pretty good. They exceeded expectations at every line.

With the company's costs slated to come down, and management promising long-term, sustainable cash-flow growth, you can see where the bull case comes from.

The thing is, while I admit to missing the boat with this one, the shares are now looking fully priced at nearly 12 times earnings, yielding 3.5 per cent. That goes down to a more reasonable 10.6 times, yielding 4 per cent the next year, but what worries me about BT, and I may be swimming against the tide here, is the company's huge pension deficit, and the uncertainty that comes with it. In my view, the market isn't paying sufficient heed to the risk it poses.

I also remain in the cautious camp when it comes to BT Vision, the broadcasting venture, although I accept that I may be proved wrong.

All that and the fact that the company has lost chief executive Ian Livingston, who has piloted the revival, makes the shares one to avoid.

Right now, were BT's shares to fall, there might be some value in taking on a few of the shares. But for me, they would need to fall quite a bit.