The last 18 months have been a rollercoaster ride for shareholders of BT (LSE: BT-A). That’s to say, there have been ups and downs but gravity has inevitably prevailed. The shares have fallen from a high of about 500p in November 2015 to a current price of 312p.
The big question now is whether the ride down has further to run or whether we’re at the bottom and the shares are set to be cranked back up.
Rollercoaster
BT’s shares climbed to 500p following news in late October 2015: namely, half-year results and an announcement that the Competition and Markets Authority had provisionally approved the company’s £12.5bn acquisition of EE.
However, after drifting lower in fits and starts through 2016, the shares fell over 20% in a single day in January this year. This was due to a profit warning and a worse-than-anticipated outcome to an investigation into improper accounting practices in its Italian business.
The shares regained a fair bit of ground through February and the first half of March, as directors made some chunky purchases and news came of a relatively favourable agreement with Ofcom on the company’s Openreach subsidiary. Rivals had been calling for a complete separation of Openreach from BT but, while the business will become a legally separate entity, BT will retain control.
However, the shares have once again drifted lower in recent weeks, not helped by a fine and compensation order late last month for some historical breaches of Openreach’s contractual and regulatory obligations.
Bull points
After all these ups and downs, there are a number of strong bull points to the investment case for BT. The successful acquisition of EE — the UK’s largest mobile operator — is a big plus, as is retaining ownership of the Openreach business.
Despite January’s profit warning, the directors have shown their confidence in the group’s future, not only with the aforementioned share purchases, but also by reiterating their intention to increase the dividend by at least 10% in both 2016/17 and 2017/18. At the current share price, this would give a very nice yield of at least 4.9%, rising to at least 5.4%.
Furthermore, as the share price has fallen to a greater degree than earnings forecasts, the forward price-to-earnings (P/E) ratio is an attractive 11.2, falling to 10.9 next year. This compares with the FTSE 100 long-term historical average of around 14.
Bear points
On the bear side, BT’s high level of debt since the EE acquisition and its seriously under-funded pension scheme represent an elevated level of risk for investors. If the outlook for the company over the next couple of years proves to be not quite as good as the directors currently expect, the dividend could easily come under threat.
For example, the challenging macro-environment referred to in the profit warning may be more challenging than anticipated. Also, raising prices to get BT Sport profitable could prove difficult and Openreach’s status could come under renewed regulatory scrutiny, if it doesn’t meet Ofcom’s expectations.
Weighing up the bull and bear points, I would rate BT a ‘buy’ at present, although with a higher-than-average risk attached. Cautious investors may want to wait for the company’s annual results, which are scheduled for 11 May.
