Why it is worth investing in Vodafone and BT shares

Disappointed and disillusioned. These two words sum up the sentiment of investors in BT and Vodafone, the two largest British telecoms companies.

Over the past decade, the shares of these two well-known companies have lost more than two-thirds of their value.

But do these declines suggest it is time to end the relationship with these FTSE 100 names?

Or are there compelling reasons to stay, given the growing international connection with British stocks and the planning revolution unveiled by the new government?

US giant Blackrock and German group Allianz are among those buying British shares, encouraged by the improving economy and the prospect of a stable government.

In this context, BT and Vodafone look almost attractive.

BT owns EE, Britain’s largest mobile network, and Openreach, which controls Britain’s broadband and telephone networks, providing these facilities to TalkTalk, Sky, Vodafone and 650 other telecoms companies.

Meanwhile, Vodafone’s UK division is hoping to merge with Three’s British division in an £18bn deal that will form the country’s largest mobile network.

Labour’s planning reforms, designed to build 1.5m new homes, are another bright spot. All of these will require broadband, says Matt Dorset, an analyst at Quilter Cheviot.

BT has been hit by a fall in housebuilding, as confirmed by its second quarter results this week. But Dorset argues that the construction of many new homes could “consolidate its status as the UK’s number one broadband provider”.

These trends are good news if you are one of the hundreds of thousands of people who have remained loyal to BT since its privatisation 40 years ago. But all shareholders of these two stalwarts must also face the challenges.

Aegon Asset Management’s Sajeer Ahmed says BT and Vodafone have struggled to get a return on their huge spending on building 4G and 5G infrastructure and rolling out full-fibre broadband.

Note: “Markets have been competitive and customers are price sensitive.”

This spending is expected to decline, meaning BT and Vodafone will generate more cash, allowing them to reduce debt and launch share buybacks to boost their share prices.

However, as Nigel Yates of AXA Investment Managers argues, their “complex corporate structures and unpredictable financial liabilities” could prove a hindrance.

He added: “We are concerned that these businesses remain value traps and see better opportunities for consistent and growing dividend yields elsewhere.”

Clearly, backing these British companies takes an act of faith.

But if you’re willing to go for the makeovers the two new CEOs are undertaking, here’s what you need to know:

BT

The long-term performance of the stock is surprising, but the price is up 13% this year, thanks in large part to the outspoken new CEO, Allison Kirkby.

Its announcement in May of a business restructuring, as well as higher dividends, confounded hedge funds that were “shorting” the stock – betting on a price drop.

Kirkby commented: “I always love to squeeze the shorts… and prove them wrong.”

The exciting speech has excited analysts, who rate the stock a “buy” with an average target price of 194p, up from 140.5p currently.

The hope of a wave of takeovers is behind some of the international enthusiasm surrounding British stocks.

At £13.8bn, BT could prove attractive to a bargain-hunting predator, especially as Openreach alone is worth at least that amount.

French businessman Patrick Drahi, head of Altice, was seen as the most likely bidder.

But Drahi has not only taken out a large loan against his 24.5% stake in BT, he could also face opposition from the government. As a result, the size of his stake represents a premium on the share price.

But Dorset says Carlos Slim, Latin America’s richest man, bought 3.2% of BT in May and may be interested in acquiring some or all of Drahi’s shares.

Since Deutsche Telekom is another major investor, other shareholders can expect some fun.

Vodafone

Vodafone is a £18bn company with 330m customers in 15 countries. Germany accounts for around a third of the business and the recovery in this area is starting to bear fruit.

At the helm is another direct boss, Margherita Della Valle, who is trying to simplify and streamline the group, while convincing dubious regulators that the tie-up with Three must go ahead.

Like BT, Vodafone also has some controversial shareholders: another French businessman, Xavier Niel, and Emirates Telecommunications, which the UK government considers a risk to national security.

All this may not sound too attractive, but the shares are up almost 7 per cent this year, to 73.22 pence.

Deutsche Bank and Goldman Sachs rate the stock “buy,” presumably on the basis that demand for mobile and broadband services can only expand anywhere in the world.

The spread of AI (artificial intelligence) will contribute to this need. The average target price is 113 pence.