Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.
Today I’m looking at Vodafone (LSE: VOD) (NASDAQ: VOD.US) .
Valuation
As the only constituent of the FTSE 100 mobile telecommunications sector, it is not possible to compare Vodafone to its sector peers. However, Vodafone has plenty of peers in the wider telecommunications sector. So, for this analysis I shall be comparing Vodafone to its closest peers in the wider telecommunications sector, Talktalk Telecom (LSE: TALK) and BT (LSE: BT-A) (NYSE: BT.US).
Still, even compared to the wider telecommunications sector as a whole, Vodafone looks slightly expensive. In particular, Vodafone trades at a historic P/E of 15 compared to the sector average P/E of 14.
Balance sheet
| Â | Net-debt-to-assets | Interest cover by operating profit |
|---|---|---|
| Vodafone | 22% | 2x |
| BT | 36% | 100+ |
| Talktalk | 31% | 8x |
The cost of building a telecommunications network is high so a high level of debt is common in the telecommunications sector. However, despite having the lowest net debt position in the trio, Vodafone actually has the lowest interest cover by operating profit.
In comparison, although BT has a higher level of debt than Vodafone, BT is able to cover its interest costs more than 100 times.Â
Company’s performance
| Â | Earnings growth past five years | Net profit margin |
|---|---|---|
| Vodafone | -9% | 1.5% |
| BT | 66% | 12% |
| Talktalk | 26% | 6% |
Unfortunately, Vodafone’s net profit margin is razor thin and was only 1.5% during 2012. Â This was equivalent to a tiny 0.4% return on assets, which is lower than the current Bank of England base rate.
Actually, excluding Vodafone’s dividend income from its investment in Verizon Wireless, the company actually made a loss of nearly £2 billion.
What’s more, Vodafone’s earnings have shrunk 9% during the past five years while its closest peers have all seen earnings grow at rapid rates. Â
Dividends
| Â | Current Dividend Yield | Current dividend cover | Projected annual dividend growth for next two years. |
|---|---|---|---|
| Vodafone | 4.7% | 1.5 | 7% |
| BT | 2.6% | 2.8 | 32% |
| Talktalk | 4.1% | 1.4 | 34% |
| Sector average | 3.6% | 2 | Â |
Figures exclude any special dividends from Vodafone
According to the figures above, Vodafone’s dividend growth will lag that of its peers for the next two years. Still, the company does offer a higher than average dividend yield, which is covered one-and-a-half times by earnings.
Furthermore, during the past three years alone, Vodafone has returned approximately £30 billion through both share repurchases and dividends, about 46p per share — a cumulative return of nearly 20% per share. Â
Foolish summary
All in all, based on the numbers above I do not have much faith in Vodafone’s ability to outperform its sector peers.Â
What’s more, I feel that even Vodafone’s sale of its share in Verizon Wireless will not improve the company’s outlook as, without the additional cash from Verizon during Vodafone would have made a loss last year. Still, the company’s current dividend is attractive. Â
So overall, I feel that Vodafone is a much weaker share than its peers.Â