MENU

Why BT Group plc Is A Bad Share For Novice Investors

I recently told you why I think Vodafone is a great investment for novices, and in general I think the telecommunications industry is a good one for a decades-long investment.

But what about the business that started it all in the UK, BT Group (LSE: BT-A) (NYSE: BT.US)?

No thanks, and I’ll tell you why.

The BT share price has done very well over the past 12 months, putting on 50% to today’s 344p, so you’d have done very well out of it had you bought a year ago.

In fact, if you’d got your timing perfect in the depths of 2009, you’d be sitting on a four-bagger today. But look back a bit further, and the price has only recently regained the level it was at in 2007.

Still, that’s in the past, and with the shares today on a forward P/E of about 14 based on current forecasts, they’re not obviously overpriced — that’s about average for the FTSE, and the company’s predicted dividend yield of a little over 3% is pretty much average, too. So, no obvious red flags there.

Expanding again

And BT does seem to be branching quite successfully into the entertainment business, too — after quite some time not really making much inroad into the satellite/cable TV market, the release of those BT Sport channels has been a popular move, with rival Virgin Media taking them on.

BT famously got out of the mobile telecoms market when it sold off O2 in 2002, but since then through a subsidiary the company has bought a slice of the UK’s 4G bandwidth, and there are suggestions that a 4G network could integrate with BT’s broadband home hubs quite nicely — at full-year results time earlier this year, BT said “We […] will use our wi-fi capabilities and 4G spectrum to make sure our customers will be the best connected“.

But to me that paints a picture of a company that hasn’t really been focused on what it wants, and I think BT is still running largely on its legacy of being the UK’s erstwhile land-line monopoly. That on its own wouldn’t be enough to scare me off, mind, but…

The killer

What terrifies me about BT is its pension fund, and that’s the main reason none of my money will be invested in BT shares.

The firm’s pension fund deficit is pretty much legendary in investment circles, and the diminishing value of its investments during the financial crisis came to near-disaster. A drastic recovery plan was needed, resulting in an annual payment of £525m into the fund every year since 2010.

So the panic is over? Hold your horses — that’s just a stop-gap measure as part of a plan that is expected to span 17 years! The scheme is subject to revaluation every three years, with the next one coming in 2014, and some observers this year have been suggesting the deficit could reach a staggering £6bn!

How much?

BT did make a £2bn payment last year, and could do something similar again to try to get some future cash heading in the direction of better dividends.

But get this — as of November 2010, the fund’s trustees put a £37bn value on the scheme. That’s £10bn more than the total market capitalisation of BT itself, and more than twice the firm’s last annual turnover.

So if you want to buy a telecoms company, buy one. But don’t buy a pension fund manager that’s trying to run a telecoms operation on the side — that’s no way for a novice to start out.

Finally, if you're interested in a long-term candidate that's helping supply our energy needs, but without the pension millstone of BT, check out the Motley Fool's Top Income Share report. I won't tell you what it is, but I'll tell you something -- it's in a very low-risk business, and its dividend yield of 5.5% is one of the most reliable in the FTSE.

If you want to know more, click here to get your free copy of the report today.

> Alan does not own any shares mentioned in this article.