BT Group (LSE: BT-A) (NYSE: BT.US) has received mixed press over the last few years, but I’ve started to think that the firm might now deserve a buy, despite its terrible customer service (speaking as a customer).
Here are five reasons why I’ve recently started to watch BT shares much more closely.
1. Rising dividend
BT’s dividend rose by 14.5% last year, and is expected to rise by around 13% during the firm’s current financial year, which ends in March.
A similar increase is forecast by analysts for 2014/15, and although BT shares only offer a forecast yield of 2.8%, opportunities for double-digit dividend growth are increasingly rare.
2. Free cash flow
One area where BT looks seriously impressive compared to some of its peers is free cash flow — surplus cash after capex, interest and tax payments.
BT’s free cash flow per share for the last twelve months is 34p, covering this year’s expected 10.7p dividend payment more than three times.
Free cash flow cover is the ultimate security for a dividend; if a firm has cash to spare after all of its more senior commitments, then shareholders should be able to rely on receiving some of this surplus cash through dividends and share buybacks.
3. P/E below FTSE average
BT’s share price has risen by more than 200% over the last five years, and I cannot pretend that it’s cheap. However, on a trailing P/E of 14.2 (using adjusted earnings), it’s not expensive, either — the FTSE 100 currently has a trailing P/E of 17.5.
Set against a backdrop of rising earnings and a fast-growing, well-covered dividend, BT doesn’t look expensive at all.
4. Falling debt
BT’s net debt has fallen steadily from a peak of £12.5bn in 2009 to its current level of £8.1bn.
Admittedly the company’s monster £6.7bn pension deficit changes the picture slightly, but if interest rates start to rise in the next twelve months, as I suspect they might, then this pension deficit could fall rapidly, as bond yields rise.
5. TV opportunity
I have been a critic of BT’s £1bn investment in BT Sport and its associated sports licensing rights, but it’s possible that I’m wrong.
Shares in British Sky Broadcasting have fallen by 9% since BT Sport was launched, and BT’s ability to bundle free premium sport with its broadband offering could prove to be a powerful marketing tool.
