The Motley Fool: Is British Telecom a good call?

The Motley Fool started as a newsletter and has become one of the most popular personal finance websites. Anyone who follows its philosophy is called a `Foolish investor'

n our research for the Motley Fool Rule Shaker portfolio, we seek out companies dominant in their fields (otherwise known as Rule Makers in Foolish terms).

We have recently turned our attention to the telecommunications industry. We are particularly keen to find British and European Rule Makers, and this is one field not dominated by the US.

The vast bulk of telecommunications traffic is carried by the land- based trunk networks operated by such stalwarts as BT and Cable & Wireless.

The other side of the market is the advance in mobile telecommunications. With the next generation of mobile computing and communications devices just around the corner, the need for mobile data transmission cannot be ignored.

On this score, we have decided to look at both the fixed-line business and the mobile communications business, with the thought of possibly buying shares in one company from each sector for the Rule Shaker portfolio. And who else should we start with other than good old BT? Does it make the grade?

Regular readers will recall that there are four categories to a Rule Maker analysis. Brand Identity comes first, and is made up of familiarity, openness, optimism, legitimacy, inevitability, solitariness and humour.

BT certainly scores on the familiarity front. Who in this country hasn't heard of it? As for openness, what we are looking for is access to all customers, rather than any kind of closed high-value market, and BT scores on this one too.

What about optimism? Does BT appear any more optimistic than its rivals? We don't think so. Next comes legitimacy; all telecommunications services score here, no matter who is supplying them. Inevitability? Yes, certainly. Hardly anyone can get through life these days without a phone.

BT doesn't score on the solitariness front as there are so many competitors in the mobile and cable communications markets. Finally comes humour. Does BT's brand make you smile more than the Orange orang- utan? It doesn't make us smile. The score on this section is therefore four out of seven.

Next up comes Financial Location, which looks at a company's current financial position. Each of the seven criteria carries two points, and we give BT a score of 9 out of a possible 14. BT scores a maximum 2 in the repeat purchase stakes, as its service is bought every time a customer makes a call.

Another 2 points are scored thanks to BT's net margin of 16.4 per cent, and a further 2 for the company's management of its short-term cash flow (as measured by the Foolish Flow ratio, which compares the flow of cash in from short-term debtors and out to short-term creditors). On the subjective criterion of familiarity and interest, BT scores another 2 points, as most Fools here use and are happy with the service.

A single point is scored for a gross margin of 48.3 per cent, but no points are scored on sales growth (it has fallen), or the cash-to-debt situation (far too much debt for Foolish approval).

The third category, Financial Direction, looks at the same criteria again, but in terms of how things are going from one year to the next. If they are getting better, the company gets a higher score. There is a maximum of 3 points in each of six categories, and we give BT a score of only 8 out 18. The company's margins and cash flow are not moving in an altogether favourable Foolish direction.

The final category measures Monopoly Status. We need to compare BT with the closest competitor we can find - we chose Cable & Wireless. Comparing margins, cash-to-debt ratios, and cash flows (that old Foolish Flow ratio again), BT comes out firmly on top, scoring 16 out of a possible 20.

There is an extra point to be had if we like the company, in a purely subjective way - and we do. So that gives BT a total score of 38 out of 60. That doesnot make it an automatic choice by a long way, but we'll be keeping it on the back burner as we look at the mobile communications market in the future.

Our Foolish analysis in no way constitutes a recommendation to buy or sell a share. For that, you must make up your own minds. As always, readers are invited to offer their opinions over at the Motley Fool website www.fool.co.uk on our Rule Shaker message board.

ASK THE FOOL

I'm interested in the LSE's new technology index, which I could follow via a unit trust. However, my risk-loving side says I should split my investment between two tech stocks and hold. My cautious side suggests I invest in an established tech sector unit trust, and wait for TechMark to get known.

GH, London

The Fool replies: What proportion of your money to invest in technology companies, and how many you split it over, is a question that only you can answer. We would suggest caution when considering unit trusts, as more than 90 per cent fail to match the relevant stock market index. If you want to follow the TechMark index, look for a low cost index tracker.

n If we publish your question, you'll win a copy of `The Motley Fool UK Investment Guide'. E-mail UKColumn@fool.com or post to Motley Fool, 79 Baker Street, London W1M 1AJ.

FOOLISH TRIVIA

The first five correct answers out of the hat win a copy of `The Motley Fool UK Investment Guide'.

Which company, reporting interim results last week, suffered from the loss of sales of cheap booze?

n Answers by e-mail to: UKColumn@fool.com or by post to: Motley Fool, 79 Baker Street, London W1M 1AJ.

n Last week's answer: NatWest.

News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
News
i100
Sport
sportDidier Drogba returns to Chelsea on one-year deal
PROMOTED VIDEO
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
News
i100
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
people
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
people
Sport
Rhys Williams
commonwealth games
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

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little