One of the keys to being a successful long-term investor is portfolio construction. You need to build a portfolio that suits your own needs and risk tolerances, and which will allow you to sit back, watch your money grow, and ride out any market turbulence.
The worlds most successful investors always prioritise portfolio construction and risk management over everything else. One of the most common ways to bring an element of stability into an equityportfolio is to include defensive shares, such asSKY (LSE: SKY) andBT (LSE: BT.A).
Outperforming
Over the years, BT and Sky have proven time and again that investors can rely on them to provide capital growth, and income, even in the most turbulent markets.
For example, over the past ten years Skys shares have outperformed the wider FTSE 100 by more than 90% while BTs shares have outperformed the UKs leading index by more than 100%.
Including dividends, BTs shares have returned 9% per annum overthe past decade and Skys shares have returned10% per annum. Over the same period, the FTSE 100s annual return has been closer to 5%, even after including dividends.
A model portfolio backtested over the past decade shows how these two companies could have revolutionised your returns over the years.
If youd invested 1,000 in BT, Sky and a FTSE 250 tracker ten years ago, today your investment would be worth 9,317 including dividends, a total gain of 210% or 12% per annum. A direct investment in the FTSE 100 would have produced a return of less than half this figure over the same period.
Set to continue?
The fundamental question is: are these returns set to continue? Well, BT and Sky have been able to outperform the market because their business is surrounded by a wide moat, and there are fewif any serious competitors to theirdominance.
With this being the case, BT and Sky should be able to continue to dominate their respective markets and rack up impressive returns for shareholders.
A quick look at the figures reveals that BT is the cheaper of the two companies. Although, for income seekers, Sky could be the better pick.
Crunching the numbers
BT currently trades at a forward P/E of 15. Earnings per share are expected to fall by 3% this year but rebound 7% during the companys next fiscal year. BT currently supports a dividend yield of 3%, and analysts expect the company to hike the payout by 5% per annum for the next two years, leaving the company with a dividend yield of 3.3% for 2016/2017.
On a P/E basis, Sky is more expensive than BT. The company currently trades at a forward P/E of 17.2. City analysts expect Skys earnings per share to increase 13% during 2016. Skys dividend yield stands at 3.3%.
However,by using other multiples to value BT, we get a different result. Using theenterprise value to earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) ratio, which measures cash earnings without accrual accounting and cancels the effects of different capital structures, BT looks to be the cheaper bet.
BT trades atan EV/EBITDAratio of 7.8 compared to Skys 14.
Doyour own research
This is just aroughappraisal of Sky and BT’s prospects. Before making a trading decision, you should conduct your own research to see if the two companies are suitable for your portfolio and financial goals.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
