MARKET COMMENT
BT's Worth Buying

By Maynard Paton (TMFMayn)
May 20, 2004

You don't find many companies that dominate their sector, report a 19% improvement in earnings and raise their dividend by 31%, yet trade on a forward price to earnings (P/E) ratio of under ten and offer a near-6% yield. Yet that is the case with BT (LSE: BT.A).

Shrinking sales have caused BT's market value to languish in recent years. Regulatory pressure and mobile competition continue to squeeze revenues at the firm's traditional fixed-line services, emphasised again by this morning's full-year results, which showed voice-related revenues falling 7% to £9.0b.

However, a top-line turnaround looks to be on the cards. Sales of broadband and other so-called 'new wave' activities jumped 30% last year and, following numerous quarters of declining group revenues, the last three months saw overall turnover remaining steady. Naturally, the impressive profit and dividend growth stemmed largely from cost cutting and good cash generation. Operating margins are now approaching a quite decent 16%, while net debt -- which once topped £30b -- was trimmed a further £1.1b to £8.4b.

Up 4p to 177.5p in early trade, are BT shares worth buying for the long term? Probably. Estimates made prior to today's statement suggest earnings per share of 18.5p (up 9%) will be generated in the current year. And with the company intending to distribute a greater share of its profits, a 10.4p dividend (up 24%) is also forecast. It's fair to say the forward P/E of under ten and yield of almost 6% discount just about every watchdog and competition issue.

In fact, with a 69% share of the residential market, the constant regulatory attention is a sign that BT is expected to remain a resilient, cash-generative business for some time to come. Its other long-term attraction is that, if BT keeps riding the 'new wave', the present ex-growth rating ought to disappear.

Where next? Telecom Watchdog Hounds BT | Why I Bought BT.