Annual results from BT were expected to be bad today. And boy, was that expectation met!
Pundits have, for some time, been expecting today's annual results announcement from BT Group (LSE: BT-A) to be a tale of woe, with feared disasters including the following:
- Massive losses
- Dividend slashed to nearly nothing
- Around 10,000 redundancies
- A pensions deficit bigger than the value of the company
But what did we actually get?
BT Global in turmoil
Thanks to a dreadful year from BT Global Services (which handles network services for large businesses), the company announced an annual loss of £134m after having taken a painful £1.3bn write-down from that unit (a big chunk of which was due to a single IT contract with the NHS). In the words of Chief Executive Ian Livingstone:
"Three out of four of BT's lines of business have performed well in spite of fierce competition and the global economic downturn. However this achievement has been overshadowed by the unacceptable performance of BT Global Services and the resulting charges we have taken. During the year we have changed the leadership of BT Global Services and started to turn the division around."
So they've swallowed the losses and got rid of the bosses. Let's hope that is indeed enough to turn things round.
When adjusted to take out the cost of the write-down, we are left with a pre-tax profit of £429m, which is still a long way short of most analysts' recent forecasts.
Divide and disappear
BT's dividend has been at the forefront of many investors' minds, with the company having enjoyed an enviable track record of steadily rising dividends since its crisis year of 2001, and fears were today realised with a near 60% cut. The full-year dividend has been slashed from last year's 15.8p to just 6.5p.
Redundancies
With 15,000 jobs at BT having already been lost in the 2008-09 year, a further 10,000 redundancies were expected to be announced for the coming year. But the jobs picture has turned out worse than that, with 15,000 now expected to go. BT hopes that most of those will go through natural wastage and voluntary redundancies, and that no compulsory redundancies will be needed.
If redundancy packages are suitably attractive, a lot of older employees might well be tempted into taking their pensions early. But with the state of the company pension fund, BT had better hope (financially at least) that the retirees don't live too long.
Pension hole
It's been a dreadful year for BT's pension coffers, as this past year has seen its fund reduced from a £2b net surplus last year to a £2.9b deficit this year. That's BT's own figure and, unfortunately, the results if its pension review with the pension regulator, which were expected sometime in May, are not now going to be released for several more months.
While £2.9b is a hefty sum, at least it is not as bad as the worst of the doom-sayers were fearing, and it should hopefully be manageable. To that end, BT is planning to increase its pension fund contributions to £525m a year over the next three years.
Should we see a recovery in stock markets over the next few years, that would also boost the value of the pension fund's assets, and in a few years' time we might be looking back on this as a short-term blip. After all, BT did manage to get its 2001 net debt mountain of £30b down to the more manageable £10b level of today, which puts a £2.9b pension deficit into proportion.
The future?
Ian Livingstone has told us he expects to make savings in operational costs and capital expenditure of "well over £1b" in 2009-10, and is expecting to see free cash flow of more than £1b a year from then onwards (before contributions to the pension fund deficit).
He also tells us that he believes "BT will emerge from the recession a stronger company to the benefit of our customers and shareholders".
I think that's true (and let's face it, it could hardly come out of recession much weaker, could it?), and that the company is biting the painful bullet and taking the actions it needs. Operational costs really must come down, and the expected redundancies, though undoubtedly painful, really are necessary if productivity is to be raised sufficiently to get back to steady profits and dividends, and to compete in the ever more difficult global telecommunications market place.
What about investors?
With BT's share price having recently hit its lowest level since privatisation in 1984, there must be a lot of recovery specialists out there looking at taking a stake right now. Who knows, with a market cap of just over £6b now, BT might even make a tasty takeover target for one of the larger global telecoms giants.
Personally, I think, barring any unexpected horrors from the ongoing pensions review, the bad news is all out in the open now. Unless the general economic climate pushes the whole market back down again, I really can't see the shares getting much lower than the 92p price at the time of writing.
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