The Hidden Nasty In BT Group plc’s Latest Results

Last week’s strong third-quarter results from BT Group plc (LON:BT.A) contained a sting in the tail, says Roland Head.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT

BT Group (LSE: BT-A) (NYSE: BT.US) leaped ahead of the wider market last year, delivering a stunning 64% gain for investors, compared to the 14% price gain delivered by the FTSE 100.

The good news seems to keep on coming, too — last week, BT reported an 8% increase in pre-tax profits and record numbers of new fibre broadband customers.

So what’s the problem?

BT’s gigantic pension deficit is no secret, but last week’s news that the firm’s pension shortfall rose by almost 9% to £7.3bn during the final quarter of 2013 came as a surprise.

To put this into context, £7.3bn is nearly double BT’s £7.6bn net debt. What’s more, BT’s pension deficit is beginning to look out of control, as it has tripled in less than three years, from £2.4bn in June 2011, to its current value of £7.3bn.

Why is it getting worse?

BT blamed the rise on ‘an increase in market inflation expectations’, which will mean that index-linked pension payments will rise faster, increasing the fund’s liabilities.

However, this news might surprise to investors, who have seen gilt yields rising and current inflation levels falling — a combination that was expected to lead to a reduction in pension deficits for companies such as BT.

For private investors, the technicalities of pension deficit calculations are less relevant: the big question is how is BT going to dig itself out of this hole, and will it lead to falling profits, or even a dividend cut?

What will happen next?

The next triennial valuation of BT’s pension scheme is due later this year. Following the last review, in 2011, BT agreed to make nine annual additional payments of £325m, from 2013 until 2021, a reduction from the £525m annual payments it was making until 2012.

Given the rapid rise in BT’s pension deficit, the scheme’s administrators may decide that more decisive action is necessary, and might try to reverse this year’s payment reduction.

If this, or something similar, happens, then BT’s dividend could be threatened, as its debt levels would be likely to rise, meaning that more of its cash flow would be required to fund interest payments.

BT shares already yield a below-average 2.8% — any threat to the firm’s expected dividend growth could result in a rapid re-rating of BT’s share price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Roland does not own shares in BT Group.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »