The telecoms giant directs a flood of cash into its pension 'black hole' and its shares rise 5%.
When it comes to company pensions, you don't get much bigger than that operated by telecoms Goliath BT Group (LSE: BT-A).
Of course, BT is a big British business. It operates in more than 170 countries, employs nearly 93,000 people and reported revenue exceeding £20 billion and pre-tax profit of more than £1.7 billion for the year ending 31 March 2011.
BT was privatised in November 1984, so it has been a London-listed company for over 27 years. Prior to this, it was owned by the state and was one of Britain's biggest employers, with a workforce of 235,000.
BT's big 'black hole'
Partly as a result of its public-sector legacy, BT operates one of the largest pension schemes in Britain, with liabilities of £40.8 billion and assets of £36.7 billion. The difference between the two (£4.1 billion) is the deficit or 'black hole' at the heart of BT's pension scheme.
In common with other corporations, BT reviews its final-salary pension scheme every three years with the pension trustee. These two parties today announced that they have agreed the latest triennial valuation as at 30 June 2011.
In December 2008, during the global financial crash, BT's pension deficit was £9 billion. With the rebound in asset prices since, the deficit has tumbled to £4.1 billion.
In order to make good this shortfall, BT today agreed to pay a lump sum of £2 billion into the scheme before 31 March 2012. This balloon payment will be funded by BT's cash pile of £1.5 billion and further borrowing. It will be followed by nine yearly payments of £325 million from March 2013 to March 2021.
Thus, BT has agreed to pump £4.925 billion into its pension scheme over the next decade. That is one immense pension contribution!
BT shares jump
BT shareholders seemed to welcome the news that it is to pay off almost half of its pension deficit in one fell swoop. As I write, BT shares trade at 230.5p, up 4.7%, valuing the group at almost £18 billion. Earlier this morning, BT's share price briefly topped 235p, which was a 12-month high.
By accelerating its pension payments, BT stands to gain from changes to corporation tax. Payments made this tax year attract tax relief at 26%. However, as corporation tax comes down, this tax relief falls to 24% in 2012-13, 23% in 2013-14 and 22% in 2014-15. Hence, by paying more upfront, BT gets a bigger kickback from HM Treasury.
Ian Livingston, BT's chief executive, said today: "BT's long-term sustainable cash generation has improved significantly since the 2008 valuation and we remain focused on improving BT's financial strength, investing in our future and enhancing shareholder returns."
BT = Buy Today?
At 230.5p, BT shares trade on a forward price-to-earnings ratio of 9.6 and offer a dividend yield of 3.9%, covered a healthy 2.7 times. Given BT's bounce-back over the past three years, these fundamentals look decidedly modest.
Hence, for investors, I suspect that BT is short for 'Buy Today'!
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