BT Group (LSE: BT.A) shares appear to have stabilised after the company’s well-reported recent profit warning and writedown following the discovery of an accounting scandal in its Italian division. So let’s take a closer look to see if the firm is investable.
Keeping it simple
I reckon the worth of any business boils down to the cash it produces or the potential it has to generate cash in the future.
It takes cash to pay a dividend, and a firm’s ability to deliver and grow dividends seems a good place to start when analysing whether a company is an attractive investment proposition. Well-known and successful investors such as Neil Woodford and Lord Lee say they take that kind of approach when appraising investment opportunities.
There’s always something to worry about with all firms, especially when they sport a low-looking valuation. Trawl the web and you’ll find plenty of articles reaching a bearish conclusion and speculating about all kinds of potential operational threats to BT’s business.
But that’s why we have value investing. As investors outside the business, we don’t really know much, so the best we can do is go by the numbers the company is producing and listen to what the directors say. I like Lord Lee’s approach when he suggests the health of a business and its outlook can be summed up by looking at the dividend and the directors’ decisions surrounding it.
Temporary operational problems and a murky outlook can be the value investor’s friend because such conditions lead to the lower valuations and fallen share prices that take some of the heat out of the risk of investing in a firm.
Some good news
At today’s share price around 310p, BT’s dividend yield runs at 4.9% or so. The directors made no move to trim the dividend when announcing the firm’s three-quarter results at the end of January. So by Lord Lee’s litmus test, the news is good and BT is paying investors a cracking income if they take the plunge now.
City analysts following the firm — who often receive guidance from directors — are forecasting a 1% uplift in the dividend for the year to March 2018 and 6% for the year to March 2019. I don’t think forecasts for the dividend would be as robust if the directors were panicking about BT’s prospects.
In last month’s results announcement, the top managers predicted flat revenue for the next two years, normalised free cash flow of £2.5bn for 2016/17 and £3bn-£3.2bn for 2017/18. That’s a handy amount of free cash flow, which compares well to the £1,075m the firm paid out in dividends last year and the £558m cost of interest payments on borrowings.
At £8,981m, net debt runs around 79% higher than a year ago but the firm’s acquisition of mobile operator EE last year is delivering what the directors describe as record growth.
BT faces challenges ahead but right now the dividend seems secure. There’s an element of cyclicality to the firm’s business, but historically, investing after the share price has been pummelled has worked out well for investors. As part of a well-diversified portfolio, BT looks more attractive to me now than when the shares were riding high just a few months ago.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.