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Vodafone Group Plc (ADR) (VOD) or BAE Systems PLC (ADR) (BAESY)? Which Is The Better Buy?

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LONDON — BAE Systems PLC (ADR) (OTCBB:BAESY) Systems and Vodafone Group Plc (ADR) (LON:VOD) operate in completely separate industries, but both companies have an attractive track record of providing high dividend yields.

BAE Systems PLC (ADR) (OTCBB:BAESY)

The two firms also have another similarity — both depend quite heavily on the substantial income they receive from their American businesses, without which they might struggle to fund their coveted dividend payouts.

I own both shares myself, but am looking top up some of my holdings — so which of these two high yielders looks the best buy today?

Vodafone vs. BAE Systems
I’m going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their most recent annual results:

Vodafone BAE Systems
Price to earnings ratio 14.2 11.7
Dividend yield 6.9%
(4.9% without special dividend)
5.1%
5-year average dividend growth rate 7.1% 8.8%
Net gearing 32% -10% (net cash)

Vodafone Group Plc (ADR) (LON:VOD) plunged into a loss in the first half of this year, thanks to a hefty 5.9 billion pounds impairment on the value of its operations in Spain and Italy.

However, the firm’s underlying operations remain profitable, and Vodafone Group Plc (ADR) (LON:VOD) was able to pay a four pence per share special dividend last year, on top of its standard dividend, giving shareholders a bumper payout that would give a yield of 6.9% at today’s 195 pence share price.

Excluding these special dividends, both companies have similar historic yields, and BAE Systems PLC (ADR) (OTCBB:BAESY)’s dividend has grown faster than Vodafone Group Plc (ADR) (LON:VOD)’s over the last five years. The defence company is also cheaper on a P/E basis, and benefits from having net cash of 387 million pounds, thanks to strong cash inflows last year.

What’s next?
Analysts’ forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let’s take a look at the latest 2013 forecasts for Vodafone Group Plc (ADR) (LON:VOD) and BAE Systems PLC (ADR) (OTCBB:BAESY):

Vodafone BAE Systems
Forecast P/E ratio 12.7 9.1
Forecast dividend yield 5.4% 5.3%
Forecast dividend growth 10.6% 4%
Forecast earnings growth 7.5% 23.2%

A Vodafone special dividend seems unlikely this year, because the firm has said that it will use the majority of the money from the 2.4 billion pounds from the Verizon Wireless dividend it received late last year to fund a share buyback.

BAE Systems PLC (ADR) (OTCBB:BAESY) continues to look cheaper than Vodafone Group Plc (ADR) (LON:VOD) on a forward P/E basis, and analysts expect stronger adjusted earnings growth from the defence firm, too.

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