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Why BT Group plc Should Be A Winner Next Year

What do the prospects really look like for our top companies heading into 2014?

Over the next few weeks I want to take a closer at some of them, and try to decide whether 2014 is likely to be a winning or losing year.

Today, I’m having a look at BT Group (LSE: BT-A) (NYSE: BT.US). And what a year BT shareholders have had!

BT shares are up 60% over the past 12 months to 369p, and from a 2009 low of just 72p the price has multiplied five-fold. And on top of that, shareholders have been getting a dividend averaging around 4-5% per year.

Here’s BT’s recent performance, together with current consensus forecasts for the next two years:

Year

to Mar

EPS

EPS

Growth

Dividend

Div

growth

Yield

Cover

2009

16.0p -33% 6.5p -59% 8.3% 2.5x

2010

17.3p +8%

6.9p

+6.2% 5.6% 2.5x

2011

21.0p +21% 7.4p +7.2% 4.0% 2.8x

2012

23.7p +13% 8.3p +12% 3.7% 2.9x

2013

26.6p +12% 9.5p +14% 3.4% 2.8x

2014 (f)

25.5p -4% 10.8p +14% 2.9% 2.4x

2015 (f)

28.8p

+13% 12.5p +16% 3.3% 2.3x

Current forecasts suggest a fall in earnings per share (EPS) of 4% for the year to March 2014, but that only covers the first quarter of the year and the remaining three-quarters will be contributing to 2015’s forecast for a 13% EPS rise — continuing BT’s record of strong earnings growth for the past few years.

Watch the trend

There’s another pleasing trend we can see from that table. BT is paying out a greater proportion of earnings as dividends — and that’s partly because less needs to be earmaked for handling the firm’s pension fund deficit that was close to crippling during the depths of the credit crunch.

From 2009 to 2012, BT’s dividend cover was slowly rising as earnings were increasingly retained. But it flattened off this year, and as dividends are set to rise faster than earnings in 2014 and 2015, by 14% and 16% respectively, we should see cover falling — but at more than two times, there’s plenty of safety margin left.

Of course, yields were better back in the bad old days, but that’s when the share price was so badly depressed. At the end of March 2009, after the dividend had been slashed nearly 60%, BT shares were on a P/E of a mere 4.9 — they were pretty much priced to go bust, and crazily cheap if you thought BT had any chance of escaping from its pension crisis and from the credit crunch.

This year’s yield, at 3.4%, was a bit higher than the FTSE’s average 3%, though for 2014 we’re likely to see it fall below the currently forecast FTSE 3.1% average — but if you’ve enjoyed the share price rise over the past year, you can consider that just a bonus.

Still looking cheap

So, you’d expect the shares to be on a high P/E now, would you? Not a bit of it.

In fact, BT’s forward P/E for March 2014 stands at only 14.6, which is just slightly ahead of the FTSE’s long-term average of 14. And that drops to under 13 based on 2015 forecasts, with the predicted dividend yield picking up to 3.4%. A lot of BT’s undervaluation is clearly out now, but for me the shares still look decent long-term value.

Will BT live up to expectations?

Well, for the six months to September 2013, we saw a 1% fall in revenue to £8.940m. But there was a 3% rise in adjusted pre-tax profit to £1,204m and a similar 3% rise in adjusted earnings per share to 11.9p. The dividend was boosted by 13% to 3.4p per share, boding well for that mooted full-year increase.

New services

But the financial figures were overshadowed by BT’s Openreach fibre broadband uptake — up 70% with fibre now within reach of 17 million premises. And by the new BT Sports channels, which already have two million direct customers and are available to around two million more via Virgin Media.

New chief executive Gavin Patterson said “These are exciting times for the company and we are determined to deliver our strategy with energy and discipline“.

Verdict: Winner!

And finally...

With world economies emerging from recession, we could be in for a good few years for the entire telecoms sector -- and whenever we think of BT, the obvious rival for our investment cash is Vodafone.

That's why the Fool's top experts have put together the all-new "Motley Fool's Guide to Investing in Telecoms", which compares the UK's top two -- did you know, for example, that BT enjoys nearly four times as much revenue per customer as Vodafone?

Click here to find out more.

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