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2022 has so far proved to be a year of contrasts for the BT Group (LSE: BT-A) and Royal Mail (LSE: RMG) share prices. While BT’s risen a healthy 12% in value, taking gains on a one-year basis to 53%, Royal Mail has dropped 14%. The courier’s now lost almost all the gains it clocked up during the past 12 months.
The BT and Royal Mail share prices are heading in different directions. But is the FTSE 100 telecoms titan the horse to bet on? Let’s have a look at how both investment cases stack up.
Which is better value?
A good starting point is to see whether Royal Mail or BT offer the best value in terms of predicted growth and expected dividends.
Pleasingly, City brokers think both companies will grow earnings over the short-to-medium term. BT’s bottom line is expected to rise 3% in the financial year to March 2022 and by another 6% in the following year. Royal Mail, meanwhile, is predicted to see earnings increase 15% and 5% in the same periods.
I think both FTSE 100 firms offer great value based on these predictions. BT change hands on forward price-to-earnings (P/E) ratio of 9.7 times. But Royal Mail edges it with a multiple of just 7.2 times.
The courier also offers better value from an income perspective. Royal Mail’s dividend yields clock in at 4.4% for this financial year and 5.5% for fiscal 2023. BT’s yields, meanwhile, sit at a fatty (but still lower) 4.1% for the next two years.
Why I like Royal Mail
There’s clearly more to consider than valuations when buying UK shares. After all, Royal Mail and BT’s low share prices might reflect the high risks they face. So let’s dig a little deeper into each business.
In the case of Royal Mail, I like the company’s exposure to the online shopping boom. The business provides an essential service in helping retailers and product manufacturers get their products to their customers. I think the business could have a very rosy future therefore, as e-commerce continues to grow.
Royal Mail shifted 15% more parcels between October and December than it did in the same quarter in 2019, its latest trading statement showed. And revenues from its packages business rose 29.7% from that pre-pandemic period, pushing turnover at group level almost 10% higher.
I’m also a fan of Royal Mail’s expansion of its overseas GLS parcels division. This strategy gives the business exposure to other fast-growing e-commerce markets (such as in Eastern Europe) and also provides strength through geographic diversification. Royal Mail acquired Rosenau Transport in Canada at the start of December 2021, for example, to boost its existing GLS operation there.
Reasons to be bullish for BT
In an increasingly digitalised world, BT’s role in keeping us all connected is also critical. The business operates a massive broadband and mobile network which it also has ambitious plans to expand. Last year, BT ramped up the number of premises it hopes to connect to its fibre network to 25m by the end of 2026. This is up five million from its previous target.
The growing involvement of Patrick Drahi is another reason why I could be interested in buying BT shares. The activist investor — and owner of telecoms business Altice — has built his stake in the FTSE 100 firm to a weighty 18%. It’s been speculated that he’s seeking to assert control over BT by steadily building his interest. It’s also been suggested that Drahi’s stake-building exercises could also be the prelude to a full takeover attempt, something that would provide obvious fuel for the BT share price.
Trouble at Royal Mail?
Of course, no share is without risk and Royal Mail could suffer turbulence if the cost of living continues to soar. This would have a detrimental impact on shopping budgets that would, in turn, strike e-commerce activity and consequently parcel volumes at Royal Mail.
The British Retail Consortium has already warned in recent weeks that “retail faces significant headwinds in 2022 [as a result of] rising inflation, increasing energy bills, and April’s national insurance hike.” However, falling parcels traffic isn’t the only danger to Royal Mail’s profits.
Royal Mail’s streamlining drive to cut costs always comes with the threat of industrial action by its workers. The courier may also suffer staffing problems if Covid-19-related absences flare up again. This was a significant problem for Royal Mail’s deliveries in the December quarter.
Will BT take a battering from competitors?
BT isn’t immune to the pressures facing the British economy either. If businesses run into trouble and cash-strapped individuals shop around for a better deal it could see demand for its telecoms services slip. Indeed, BT issued warned last week warned of falling revenues this year on a combination of a “delayed Covid-19 recovery and supply chain issues.”
The threat of competition is one that stretches beyond just the near term too. BT faces a hell of a fight to grow revenues and maintain healthy margins as its rivals invest heavily in their own operations. Vodafone for example is spending a fortune to roll out its 5G network, while Virgin Media O2 has announced plans for a joint venture with Liberty Global and Telefonica to lay fibre across the UK.
I also worry about the colossal costs that BT faces to roll out its own fibre network. The company is already swimming with debt — net debt rose to £17.7bn as of December — and its infrastructure plans could add heavily to the pile, hitting investor returns in the process.
The FTSE 100 share I’d buy is…
Both Royal Mail and BT’s low share prices reflect the significant risks both companies have to overcome. But it’s my opinion that Royal Mail offers much better investment potential than its FTSE 100 counterpart. My view of BT is soured by the huge competition it faces and the weak state of its balance sheet. At the opposite end, I believe the e-commerce boom provides Royal Mail with excellent profits opportunities across the globe. I’d happily buy this cheap FTSE 100 share for my shares portfolio today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
