Is BT a buy?

Roland Head discusses the latest figures from BT and explains why he’s tempted to invest.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

BT Group (LSE: BT-A) shares look pretty cheap at the moment. Trading on about nine times forecast earnings and with a 6.5% dividend yield, they’re a tempting target for income-seeking investors.

Despite this, the market wiped 5% off the group’s share price on Friday morning, when third-quarter figures showed a 3% drop in both revenue and adjusted earnings during the three months to 31 December.

BT said the fall was mainly due to tough trading in its Global Services division, which works with corporate customers. But I think it’s also worth noting that average monthly revenue from mobile users on contracts fell by 2% to £26.20. Despite network upgrades, tough competition appears to be keeping a lid on prices.

Here’s what worries me

BT has been on my watch list for some time, but I’ve been struggling to decide whether to invest.

My main concern is that high levels of spending haven’t generated much growth. Excluding around £5bn of annual revenue from the 2016 acquisition of EE, the group’s revenue is broadly unchanged from 2012.

A second concern is that profitability has fallen sharply in recent years. BT’s return on capital employed — a useful measure of profitability — has fallen from an impressive 19% in 2012 to just 9.4% last year.

Finally, BT’s monster £7.9bn pension deficit and net debt of £8.9bn could limit the group’s ability to invest in growth.

The outlook may be improving

I believe all of the risks facing the group should be manageable.

For example, there are signs that spending on television sports rights could soon fall. Chief executive Gavin Patterson said recently that he’d be happy to be a “strong number two” behind Sky. A recent content-sharing deal with Sky seems to support the view that both companies will co-operate to offer their customers a broader range of content.

It’s also worth remembering that the wider telecoms sector has also experienced tough trading over the last few years. BT’s market-leading scale could make it a good choice as a contrarian buy. And the recent arrival of highly-regarded chairman Jan du Plessis could also be a catalyst for a turnaround.

Cash + dividend attraction

One reason to like BT is that the business still generates a lot of cash. Today’s figures show that normalised free cash flow for the nine months to 31 December was £1,947m, broadly unchanged from the same period in 2016.

Although this normalised figure excludes the cash impact of various one-off costs, net debt was broadly unchanged at the end of 2017, despite £2.5bn of capital expenditure.

Income investors will be hoping this stable performance will support the dividend. The payout is expected to rise by 2.7% to 15.8p per share this year, giving a prospective yield of 6.5%.

I estimate the cash cost of this payout would be about £1.55bn. The company’s guidance is for normalised free cash flow of £2.7bn-£2.9bn this year. Given the other demands on BT’s cash — especially pension deficit payments — I think the dividend is at the top end of what’s affordable. A cut might be necessary .

Despite this risk, I’m tempted to put a long-term buy rating on BT. I believe there’s a lot of room for improvement and expect this value to be realised, sooner or later.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Growth Shares

This FTSE 250 stock has beaten the index by around 10x over the last year

Jon Smith rates a FTSE 250 stock that has smashed the broader index performance and could keep going based on…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

B&M shares are at record lows! Is now the time to consider buying?

The retailer, demoted from the FTSE 100 to the FTSE 250 last year, continues to struggle. But are B&M shares…

Read more »

Investing For Beginners

2 reasons why the stock market could hit 10,000 points by December

Jon Smith explains how the makeup of the UK stock market and the current valuation could support a move towards…

Read more »

Queen Street, one of Cardiff's main shopping streets, busy with Saturday shoppers.
Investing Articles

Why this FTSE 100 rocket is this investment trust’s number 1 holding

A UK investment trust is certainly going against the grain by having this FTSE 100 share as a high-conviction holding…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

These 2 FTSE growth stocks jumped 8% and 4.5% today!

Ben McPoland takes a closer look at a pair of FTSE stocks that are performing really well recently. Why are…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »