Investment View: No point in holding the line for underperforming BT

BT. Our view: sell. Price: 224.9p (+0.6p)
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The Independent Online

Is BT the incredible shrinking telecoms company?

It looks that way if you run the slide rule over its revenues. In the year to 31 March 2009 they came in at £21.4bn. Since then they have been steadily declining as the company reshapes its business and tries to make it look like a halfway decent investment proposition. That decline is going to continue through to 2014 when revenues ought (ought) to bottom out at about £18bn. To be fair, the picture looks a little better when it comes to earnings. Earnings per share stood at 16p in 2009 and should hit 25p by 2014.

But if you look historically, that's not that much different to where they were in 2004. Earnings have bounced up and down a bit since then, but the company has basically done nothing very much throughout the noughties. That does make it, for example, better than a bank. But that isn't saying very much. The word "mediocre" springs to mind and BT, by dint of its previous position as a state monopoly, generates quite a bit of cash without having to really earn it, through charging other phone firms for using its network for example.

It also faces the problem of pricing. Your phone bill might be rising but telecoms pricing is not keeping pace with overall inflation, in part thanks to the regulators.

All that and the perennial problem of the company's multi-billion pound pension fund. Even while there has been work to address its funding issues this can't (and shouldn't) be ignored by potential investors. Fancy ads featuring (somewhat) attractive young actors can't disguise this. And if you've ever been a customer of BT's broadband services they might just prompt a bitter laugh.

With the shares at 210p I suggested that it was time to cash in the last time this column looked at the shares in March. They had been on a good run, and they've not really found much in the way of direction since, although they are a little ahead of that now.

They're still not particularly expensive, trading at just nine times forecast earnings for the year ending 31 March and offering a prospective yield of 4.1 per cent, with the dividend more than twice covered by earnings.

But let's look at the biggest rival, just for comparison's sake, on valuation grounds. Vodafone reports its interims today. Unless the company has suddenly discovered gravity-defying boots, they're unlikely to make pretty reading: globally it's challenging for telecoms providers with the world's economy in a less-than-pretty state.

Vodafone is more pricey on its earnings multiple: it trades on more than 10.5 times earnings, although it's worth remembering it pays lots of those earnings out. The dividend yield of 7.5 per cent is very favourable.

I know the company's tax affairs have created a certain amount of debate and now the Indian authorities are approaching cap in hand.

My view is that it is up to the authorities to take on multinationals that aren't paying their way and, if they can't, for our political masters to shape the rules to allow them to seek a fair deal (for the record, Vodafone disagrees with India's taxman and thinks its critics are being unfair).

When it comes to the investment case, Vodafone looks interesting. While I don't expect much growth in revenue over the next two years (it will likely fall slightly). it has been far more consistent than BT on this front. Same for earnings. If the results, and the shares, look shaky today I'd be a buyer. I'd be a buyer if the reverse is true. When it comes to telecoms Vodafone is the best of a pretty ropey bunch and that yield is worth having. The shares are arguably undervalued.

On the flipside, get out of BT. Even if the shares don't look terribly expensive, an investor has to ask themselves what the point is of being in a company which isn't going to grow until 2015 and doesn't have the saving grace of a dividend yield worth getting excited over.

BT's chief executive Ian Livingston has made a decent fist of tackling the pension deficit, cutting costs and increasing the divi. But his ambition to grow the top line, laid out in May 2010, has eluded him. Hang up. There are better opportunities out there. Like Vodafone.