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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Life and Style
A monstrous idea? Body transplants might no longer be science fiction
Science An Italian neurosurgeon believes so - and it's not quite as implausible as it sounds, says Steve Connor
Sport
Demba Ba (right) celebrates after Besiktas win on penalties
footballThere was no happy return to the Ataturk Stadium, where the Reds famously won Champions League
Arts and Entertainment
Natural beauty: Aidan Turner stars in the new series of Poldark
arts + ents
News
Mia Freedman, editorial director of the Mamamia website, reads out a tweet she was sent.
arts + ents
News
people
Arts and Entertainment
The write stuff: masters of story-telling James Joyce, left, and Thomas Hardy
arts + ents...begging to differ, John Walsh can't even begin to number the ways
News
Image from a flyer at the CPAC event where Nigel Farage will be speaking
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Telesales / Marketing Executive - B2B - OTE £25,000

£17000 - £25000 per annum: Recruitment Genius: An opportunity to join this new...

SThree: Trainee Recruitment Consultant

£18000 - £21000 per annum + OTE £45,000: SThree: SThree Group have been well e...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Recruitment Genius: Business Control Manager

£36000 - £44000 per annum: Recruitment Genius: Encouraging more businesses to ...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower