Should you buy BT Group plc (LON: BT.A) today?
I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at BT (LSE: BT-A) (NYSE: BT.US) to determine whether you should consider buying the shares at 267p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
So let's look at the numbers:
|Stock||Price||3-yr EPS growth||Projected P/E||PEG||Yield||3-yr dividend growth||Dividend cover|
The consensus analyst estimate for next year's earnings per share is 24.8p (5% growth) and dividend per share is 9.4p (13% growth).
Trading on a projected P/E of 10.6, BT appears to be valued about the same as its peers in the Fixed Line Telecommunications sector, which are currently trading on an average P/E of around 10. Unfortunately, BT's average P/E and slow growth rate give a PEG ratio of around 2, which implies the share price is slightly expensive for the near-term earnings growth the firm is expected to produce.
BT offers a 3.4% yield, which is only marginally below the sector average of 3.7%. However, BT has a three-year compounded dividend growth rate of 20%, implying the yield could catch up to that of the company's peers.
Indeed, the dividend is just under three times covered, giving BT plenty room for further payout growth.
Should you buy BT for its defensive qualities?
I believe the nature of BT's business gives it a defensive nature. You see, BT owns the majority of the UK's fixed-line telecom infrastructure, although this side of the business has razor-thin profit margins and left BT to search elsewhere for growth and revenue opportunities.
In particular, this search for growth has drawn BT into premium TV broadcasting, bringing BT into direct competition with British Sky Broadcasting. Competition within BT's traditional fixed-line stronghold has put a strain on revenue, though, with third-quarter results released last week showing revenues down 6%.
Nonetheless, in the same set of results, BT reported profits before tax up 7% and earnings per share up 8%. Furthermore, I can see BT's free cash flow grew 27% over the same period. I believe those results highlight the company's efficiency drive, which is focused on improving profit margins and reducing costs.
Unfortunately, BT is held back by its pension deficit and debt pile, which currently amount to around £4 billion and £8 billion respectively. In addition, these deficits are growing rapidly -- over the last year BT's pension deficit grew 30% and the company's net debt position widened by 20%.
But even with those drawbacks, I still favour BT's P/E valuation, defensive qualities and growth, and so I believe now looks to be a good time to buy BT at 267p.
More FTSE opportunities
As well as BT, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held By Britain's Super Investor". This exclusive report reveals the favourite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.
The report, which explains the full investing logic behind Mr Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
> Rupert does not own any share mentioned in this article.