Why Vodafone and BT shares are price a name

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

Over the past decade, shares in these two household names have lost more two-thirds of their value.

But do these declines suggest this is the moment to end the relationship with these FTSE 100 names?

Or are there compelling reasons to stay, given the burgeoning international love affair with British stocks and the planning revolution unveiled by the new Government?

The US giant Blackrock and the German group Allianz are among those snapping up UK shares, enthused by the improving economy and the prospect of a stable government.

Against this background, BT and Vodafone look almost alluring.

BT owns EE, Britain’s largest mobile network and Openreach, which controls Britain’s broadband and phone networks, providing these facilities to TalkTalk, Sky, Vodafone and 650 other ‘telco’ businesses.

Meanwhile Vodafone UK’s arm is hoping to merge with Three’s UK division in a £18bn deal that will form the nation’s largest mobile network.

Labour’s planning reforms, designed to deliver 1.5m new homes, are another plus. All will require broadband, as Matt Dorset analyst at Quilter Cheviot points out.

BT has been hit by the slump in housebuilding, as this week’s second quarter results confirmed. But Dorset argues that lots of new housing could ‘solidify its status as the UK’s number one broadband provider’.

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

Sajeer Ahmed of Aegon Asset Management says that BT and Vodafone have struggled to earn a return from their vast expenditure on building out 4G and 5G infrastructure and installing full-fibre broadband.

He observes: ‘Markets have been competitive and customers are price-sensitive.’

This spending is set to fall, which means that BT and Vodafone will generate more cash, allowing them to cut debts and launch share buybacks to boost their share prices.

Yet, as Nigel Yates of AXA Investment Managers contends, their ‘complex corporate structures and unpredictable financial liabilities’ could prove to be an obstacle.

He adds: ‘We have concerns that these businesses remain value traps and see better opportunities for steady, growing dividend yields elsewhere.’

It is clear that backing these British businesses involves a leap of faith.

But if you are ready to take a bet on the makeovers being led by two new chief executives, this is what you need to know:

BT

long-term share performance is shocking. But the price has risen 13pc this year, largely thanks to the new, plain-speaking chief executive Allison Kirkby.

Her announcement in May of an overhaul of the business, plus higher dividends confounded the hedge funds who were ‘shorting’ the shares, that is betting on a price fall.

Kirkby remarked: ‘I always love to squeeze the shorts . . . and prove them wrong.’

This stirring talk enthused analysts who rate the shares a ‘buy’ with an average target price of 194p, against the current 140.5p.

The hope of a takeover spree is what lies behind some of the international excitement over British shares.

At £13.8billion, BT may appeal to a bargain-hunting predator, especially as Openreach alone is worth at least this amount.

French entrepreneur Patrick Drahi, boss of Altice, was seen as the most likely bidder.

But not only has Drahi borrowed heavily against his 24.5 per cent stake in BT, he could face Government opposition. As a result, the size of his holding represents an overhang on the share price.

But Dorset explains that Carlos Slim, Latin America’s richest man snapped up 3.2pc of BT in May and could be keen to acquire some or all of Drahi’s holding.

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

Vodafone

Vodafone is an £18billion company with 330m customers in 15 countries. Germany makes up about a third of the business and a turnaround in this area is beginning to bear fruit.

At the helm is another forthright boss Margherita Della Valle who is trying to simplify and streamline the group, while persuading dubious regulators that the get-together with Three should go ahead.

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

All this may not sound too appealing but shares have edged up nearly 7 per cent this year to 73.22p.

Deutsche Bank and Goldman Sachs rate the shares a ‘buy’, presumably on the basis that demand for mobile and broadband services can only expand – anywhere on the globe.

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