The BT share price: Here’s what I’d do now

BT Group – CLASS A Common Stock (LON:BT.A) looks cheap, but there are several reasons why I’m not buying just yet.

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Investors tend to buy blue-chip stocks because they’re dependable and predictable. Blue-chip FTSE 100 companies might not be as exciting as their small-cap peers but, most of the time, you can depend on them to give you a predictable income stream from dividends as well as steady capital growth over the long term.

That’s the theory anyway. Unfortunately, over the past four years, the BT (LSE: BT.A) share price has proven itself to be the exception. The stock has consistently underperformed the FTSE 100, losing 19.2% in 2016, 21.8% in 2017, 6.8% in 2018, and it’s down 18.6% this year.

In total over the past five years, including dividends paid to investors, the BT share price has underperformed the FTSE 100 by 12.6% per annum — that’s a huge gap.

After these declines, shares in the UK’s largest telecommunications group are dealing at a forward P/E of 8.4, and support a dividend yield of 7.3%. These metrics look too good to pass up. However, the way I see it, it’s difficult to tell at this point if BT’s problems are now behind it, or if there could be further issues ahead for the business.

More pain to come? 

One of the reasons why investors have been dumping shares in BT over the past three years is the fact the company’s dividend looks unsustainable, based on current trends. Right now, the firm is spending more than it can afford on both shareholder distributions and capital spending. As a result, net debt has nearly doubled, and the group’s pension obligations have ballooned to a colossal £5bn.

I believe the company will have to cut its dividend at some point if this trend continues. Management has already warned BT could cut its dividend “at some stage in the future” to help fund its ambitious fibre broadband expansion.

Based on these comments, it seems as if it’s a case of when, not if, BT will cut its dividend. And when a dividend cut is announced, I reckon the stock could fall further, as now it seems as if the dividend is one of the only things supporting the BT share price.

Growing out of a slump

As well as a possible dividend cut, BT earnings are also set to fall in the years ahead. Indeed, analysts have pencilled in a decline of 14% in earnings per share for the current financial year. While the City is expecting the group to return to growth the year after, considering the fact the company’s earnings have fallen since 2016, I want to see more concrete progress before trusting this optimistic forecast.

If BT can prove to the market it has returned to growth, then I think it will be worth reconsidering the opportunity here. However, until growth returns, I see limited upside for the shares from current levels.

Even though the stock looks cheap, I think it’s cheap for two reasons. The company isn’t growing and it has too much debt. Until management can solve these issues, BT will remain a ‘sell’ in my eyes. 

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.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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