Member Article

BT versus Sky - which share is better for investors?

BT and Sky are rivals. Both companies are in the FTSE 100 and provide similar services to their customers providing broadband, TV and telephone services. For investors, it is important to maximise returns and investing in the best companies is vital if the stock market is going to help you grow your money and help you increase your wealth. For more advice on how to grow your portfolio read this article.

We’ll look here at which is a better investment, BT or Sky? Both have attractive elements but also risks and it is important to make a judgment on whether the risks outweigh the benefits and it may be that neither share is worth investing in at this time.

Let’s look firstly at BT. 2017 hasn’t been a great year for the company; it has been plagued by a number of problems which have kept the share price lower than it has been in previous years where growth was much stronger and the company had investors’ confidence. Foremost amongst the problems BT is currently contending with is an accounting scandal in Italy.

Back in January 2017 it was revealed that the company would have to to write down the value of its Italian unit by £530 million after years of “inappropriate behaviour”. BT warned it would affect its results for the next two years and an independent review by accountancy firm KPMG, found improper accounting practices and “a complex set of improper sales, purchase, factoring and leasing transactions”.

Then in March 2017, BT finalised a deal to legally separate its network unit, Openreach, from the rest of the company. The regulator Ofcom had been investigating the company and assessing the options for Openreach for a while, and the outcome was not bad for BT; but investors in the company would prefer less interference from the regulator nonetheless. Having Openreach as a separate entity adds complexity to the business which raises costs and gives BT less competitive edge and pricing power.

In July 2017, in its first quarter results, BT revealed profits had fallen after it took a £225 million charge related to its Italian accounting scandal. BT had to pay the money to Deutsche Telekom and Orange to avoid legal action over the issue; the two companies hold stakes in BT as a consequence of the deal that saw them sell the EE mobile network to BT. The charge resulted in BT’s first-quarter profits falling 42% to £418 million. Alongside the results there were a number of new senior management appointments which adds to the confusion at the top of the company.

The major news at Sky is the on-going possible takeover of the company by Rupert Murdoch’s 21st Century Fox. In July 2017, it was reported that although the deal received EU approval earlier in the year, the deal is now potentially be the subject of an in-depth competition probe in the UK.

The UK’s Culture Secretary, Karen Bradley, said she was “still minded” to refer the bid by Murdoch-controlled 21st Century Fox to the Competition and Markets Authority for further scrutiny. Mr Murdoch already owns 39% of the satellite broadcaster and back in December, 21st Century Fox offered £11.7 billion for the rest of the company. The Sky board incidentally are keen for the takeover to proceed.

Also in July 2017, Sky announced its annual results. The results showed that the company’s operating profit was down 6 percent to £1.5 billion as Sky’s ruthless cost cutting was not able to fully match the £629 million extra it paid for top flight football. A £51 million investment to enter the mobile market added to the pressure on the bottom line.

The results also revealed £56 million in costs related to the Fox takeover, with £16 million of that going to advisors, and the rest going on “share-based payments” that rose because of the increase in the share price spurred by the bid. Sky suffered the decline despite a 5 percent increase in like-for-like revenues to £12.9 billion, driven by price increases and new products.

Most worrying however for investors in Sky was the rate of churn, the number of customers it lost. Sky said 11.5% of its customers quit over the past year in the UK and Ireland, compared with 11.2% the year before; the company said customer churn was “at a higher level than we would like”, but added it had a “strong set of plans to address it”. Sky made a similar statement in December when it released its half-year results, suggesting it has failed to stop customers quitting the service for streaming rivals such as Netflix.

For investors, the high level of churn, coupled with sharply increasing costs for broadcasting live Premier League football, should be a concern and something to continue to monitor. It seems unlikely either headwind will decline soon, meaning Sky may have to successfully raise prices, spend more on R&D and innovation, or cut costs elsewhere and all these options create uncertainty and are not guaranteed to succeed.

Indeed, Sky is taking steps in this direction already creating 300 new technology jobs in‎ Leeds, London and Milan to focus on enhancing its ability to “deploy in and out-of-home streaming platforms”. Furthermore, Sky announced it will be increasing its investment in original programming by 25% during the year.

Both BT and Sky clearly face significant headwinds and threats which may negatively affect the share price. Sky seems like the more volatile of the shares because if the takeover falls through investors may panic; the share price rose dramatically when the possibility of the bid was first announced.

For both BT and Sky increased football broadcasting costs represent a threat to shareholder returns, although if marketed well the cost could be justified and be used to attract new customers and reduce churn, thereby increasing profits. This will be particularly important for Sky as it relies more on broadcasting and especially on sport and football specifically.

The acquisition of EE by BT has diversified the company, although it has added significant debt. The company has had a bad year so far after years of growth which followed its entry into football broadcasting. As the price of BT’s shares has already fallen heavily it may be the less risky investment – provided no more accounting scandals and corporate governance issues are uncovered. Any more accounting scandals that are found will be hugely damaging to investor confidence and therefore the share price.

However, BT’s dividend yield of near 5% offers some protection for investors, as does the fall in the share price which means the shares have a PE ratio of only just above 10 at the time of writing and are well covered by income. A figure below 15 equates to good value. Sky has meanwhile scrapped its dividend and trades on a much higher PE of around 15 to 16 meaning it is inherently riskier as it is not so attractively priced – especially considering the challenges it faces.

This was posted in Bdaily's Members' News section by Andrew Ross .