Are Sky plc & Vodafone Group plc Set To Outperform Again During 2016?

The FTSE 100 has gone nowhere this year. Indeed, year-to-date the index has declined by around 7% excluding dividends. 

However, Vodafone (LSE: VOD) and SKY (LSE: SKY) have both produced positive total returns for investors. Vodafone has produced a total return of 2.3%, and Sky has returned 24.3%. In other words, Vodafone has outperformed the wider FTSE 100 by 9.3% and Sky has outperformed by a staggering 31.3%. 

And there are several reasons to believe that Vodafone and Sky could put in a repeat performance next year. 

Upbeat outlook

Vodafone’s strong performance during 2015 was a result of the company’s better-than-expected trading. The company’s shares jumped by as much as 4% in a single day after the company served up a set of consensus-beating half-year results.

City analysts were expecting the telecoms giant to report sales growth of 0.8% for the first six months of its financial year, but the group surprised the market by reporting organic service revenue growth of 1.2%. What’s more, Vodafone hiked its full-year earnings before interest, tax, depreciation, and amortisation (EBITDA) guidance to between £11.7bn and £12.0bn. 

On an organic basis, Vodafone’s EBITDA expanded 1.9% in the first half, which may not seem like might but last year, the group’s EBITDA fell 10% in the same period. Vodafone’s EBITDA margin also increased by 0.2% year-on-year as customers moved to higher margin services. 

If Vodafone continues to report sales and margin growth throughout 2016, the company could be on track to outperform the market yet again. 

Merger activity

Sky has beaten the market this year because the City has repeatedly cited the company as a potential takeover target. Further, the group has continued to report impressive earnings growth. Sky’s recent deal to merge with its European counterparts has made it one the largest pay-tv providers in Europe and thanks to the merger Sky’s earnings per share are on track to grow 13% to 63.4p this year.

According to City analysts, these figures suggest that Sky’s shares are trading at a forward P/E of 17.7, which isn’t overly expensive and leaves room for further share price appreciation next year. 

There’s also still the possibility that Sky could attract a suitor. Vodafone is just one of the many companies that are rumoured to be interested in making an offer for the pay-tv provider. 

Nevertheless, even if Sky’s shares flounder next year, investors shouldn’t be concerned. Investing is all about looking to the long-term, and when it comes to achieving long-term returns for shareholders, few companies can rival Sky’s performance. 

The company has been able to achieve staggering returns for investors over the past five years. Group return on equity (profit earned in comparison to total shareholder equity) was 64% last year and has averaged around 80% since 2010. What’s more, last year the company generated 100p per share in free cash flow.

These impressive performance metrics have helped Sky increase shareholder equity at a compound annual rate of 41% since 2010. Book value per share over the period has risen from 32p to 184p as reported at the end of last year. There are not many other companies out there that have been able to achieve this rate of growth. Since 2009 Sky’s shares have outperformed the FTSE 100 by 125%.