The BT Group (LSE: BT-A) share price is down by 5% as I write after the company said that new government guidance on 5G equipment would cost an extra £500m over the next five years.
The company’s share price has fallen by more than 25% over the last year as it’s become clear that there will be no quick fix to the firm’s problems. Today’s third-quarter results confirm this — profits for the three months to 31 December were slightly below expectations. Despite this, newish chief executive Philip Jansen is confident he can hit full-year forecasts.
As a shareholder myself, I believe BT shares offer long-term value at this level. But I’m not blind to the risks here. After all, this is a business that will always need to keep spending to keep its networks up to date. Alongside this, BT also has a hefty pension deficit and a fair amount of debt. Selling my shares and investing elsewhere might be a safer choice.
Today I want to take a fresh look at the situation and update my view on this popular stock.
How bad are the numbers?
Today’s third-quarter figures suggest the firm is making decent operational progress. The EE 5G network is now live in more than 50 locations, which BT says puts it ahead of rival networks. The rollout of fibre connections for ultra-fast broadband is also accelerating — Openreach has now passed 2.2m premises and is adding another 26,000 each week.
New 5G and fast fibre broadband services will hopefully drive long-term revenue growth and attract new customers. But for now, BT is facing a number of headwinds. Average revenue from landlines fell by 4% due to falling numbers of people making voice calls. On mobile, the shift towards SIM-only contracts has pushed average contract revenue down 5%.
These trends contributed to a drop in revenue, which fell by 2% to £17,246m during the nine months to 31 December. Adjusted cash profits for the period, BT’s preferred measure, fell by 3% to £5,900m. More worryingly, free cash flow fell by 42% from £1,737m to just £1,000m as spending on network upgrades and football rights ate into the group’s cash flow.
Directors have been buying shares
I’ve taken some encouragement from recent director buying. Finance boss Simon Lowth spend £867,116 on stock just before Christmas. And CEO Mr Jansen has spent almost £4m buying shares since he took charge in early 2019.
Admittedly, some of these purchases may have been required by each man’s contractual shareholding requirements. But it’s still encouraging to see these purchases made in the market rather than by accumulating share options.
My view
BT remains a cash-generative business with solid profit margins. And I have confidence that the partnership of the CEO and the chairman, Jan du Plessis, will eventually deliver a good result. Both men have strong track records and have been recruited to reverse BT’s declining performance.
However, this won’t be an easy or quick fix. Although the shares look cheap on seven times forecast earnings, analysts expect the dividend to be cut by 20% to 12.2p next year. That would cut the dividend yield on BT stock from a risky 8.8% to a more sustainable 6.9%.
At current levels, I continue to think BT offers value. But I think shareholders will need to remain patient.
