I’ve spent a lot of time looking at Diageo (LSE: DGE) and BT (LSE: BT.A) shares recently. The two FTSE 100 companies have both endured tough times and are trying to convince investors that better days lie ahead.
Diageo is easily the weaker performer. Shares in the spirits giant have slumped 50% over five years and continue to slide, down 15% in the last 12 months. BT is up 20% over five years, but its shares have slipped 5% in the last year.
They’ve both done poorly, but of course, buying shares when they’re down can be a wise long-term strategy. It allows investors to get in at a bargain price. So are these two worth considering?
What do the numbers say?
Diageo looks reasonable value, trading at a price-to-earnings ratio of around 14.3. That’s a fraction below the FTSE 100 average of about 15. BT looks cheap at around 11.2 times earnings.
Diageo’s latest full-year results (6 August) were mixed. Organic sales fell 2% to $19.bn, but underlying operating profit rose 2% to $5.7bn thanks to cost savings. Investors chose to look on the bright side, and the shares jumped on the day.
BT’s Q1 results (23 July) weren’t exactly thrilling. Revenue was flat at £4.3bn, while adjusted EBITDA fell 1% to £2bn. Yet there were signs that its long-running turnaround is beginning to work. It looks set to hit full-year fibre buildout and cash flow targets.
Checking out their dividends
So what about the income? Diageo’s dividend yield has fallen to 2.1% after new CEO Sir Dave Lewis halved payouts earlier this year. BT is more attractive for income, with a trailing yield of 4.1%. So investors are getting a decent level of income while they wait for the shares to kick on.
It’s also further along its turnaround. BT CEO Allison Kirkby has spent the last couple of years cutting costs, disposing of non-core businesses and concentrating on the UK telecoms operation.
Openreach is the big opportunity. BT has investing heavily in its full-fibre network which now accounts for more than half of broadband revenue. It’s targeting cash flow of around £2bn this year and £3bn by the end of the decade. Openreach added a record 574,000 full-fibre customers in the latest quarter, taking total connections to 9.4m (despite shedding 192,000 customers).
Both firms have big debts
That gives BT something Diageo currently lacks: a fairly visible route to stronger cash generation. BT still has risks. It has a huge infrastructure asset, but also huge capital requirements and £20bn of debt.
Diageo’s brands remain exceptional, but consumers aren’t drinking as much as they did, particularly in North America. And it has $20.5bn of net debt to deal with.
Diageo remains my preferred option because I can see more recovery potential. If Lewis can revive sales, strengthen the balance sheet and put some fire back into those famous brands, there could be considerably more room for the shares to recover.
Both are worth considering but I can see more exciting growth opportunities elsewhere on the FTSE 100.
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Harvey Jones owns shares in Diageo.
This story originally appeared on Motley Fool
