Is the BT share price finally low enough to make the stock a bargain?

Should you buy into the big dividend yield on offer with BT Group plc (LON: BT.A)?

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In an article published on 13 December, I singled out telecommunications company BT Group (LSE: BT.A) as “another high-yielding stock that’s been pummelled by the market.” Back then, with the shares at 269p, I was tempted to buy “because they look cheap,” but wanted to make sure the downward trend had halted and that the chart was turning up.

No evidence of a change in sentiment

Today, the shares change hands around the 230p level, so they’ve fallen further. There’s little evidence that the downward trend has turned. There’s yet to be a convincing series of higher highs and higher lows on the chart, and the share price remains below the 200-day, 150-day and 50-day moving averages. From this, I’d conclude that investor sentiment has yet to turn in a positive way towards BT.

It’s not easy being BT. The firm has high debts, faces competition, and always seems to be restructuring in a bid to push down costs and to remain compliant with regulator Ofcom’s demands. Yet in early February, with the third-quarter results report, chief executive Gavin Patterson said that results were in line with management’s expectations and he was confident in the outlook for the year. City analysts following the firm expect earnings to advance 3% for the year to March 2019 and 1% the year after that, so although the directors are confident of hitting earnings targets, those targets are nothing to become excited about.

In an interesting move, it agreed a reciprocal wholesale deal with Sky aimed at sharing TV content — Sky will make BT channels available on its platform and BT will make Sky channels available on its. I think that is a good situation for the telecoms giant and could lead to fewer BT customers migrating to Sky for better TV content. However, competition from Sky and others looks set to keep the firm on its toes, so I’m not expecting the sudden emergence of strong earnings growth projections any time soon.

Cheap for a reason?

On Thursday, the company announced its successful bid of just over £302m for 40MHz of 3.4GHz spectrum for 5G services in the government’s auction operated by Ofcom. BT said its EE mobile network delivers 4G services to 90% of the UK geography and will now be able to launch future 5G services too, “keeping our nation at the forefront of digital communications,” which is a lofty ambition. But will it pay? We’ll have to wait to see if the move improves the company’s finances.

BT battles on, but despite its operational progress I can’t see much on the horizon capable of propelling the shares higher and I maintain my view that the firm is “challenged but cheap.”  Indeed, the recent share price near 230p throws up a forward price-to-earnings ratio just over eight for the trading year to March 2020 and the forward dividend yield runs a little over 7%. Forward earnings should cover the payment around one-and-three-quarter times.

Without meaningful growth on the cards, I think the valuation is low for a reason. If buying low valuation metrics was all there was to the game of investing, we’d all be rich. It isn’t, and we are not, so I’ll look elsewhere for investments for my retirement portfolio.

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.

Kevin Godbold 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.

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