Is BT’s share price the bargain of 2018?

BT Group plc’s (LON: BT.A) shares are down over 50% in two years. Is now the time to buy?

| 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.

Over the last two years, BT Group (LSE: BT.A) has been one of the worst performers in the FTSE 100. The stock has fallen from near 450p to just 210p today, a decline of over 50%. After such a significant share price fall, are BT shares now a bargain? Is now the time to be buying? Let’s take a look at the investment case.

Valuation

At first glance, the share price does appear to offer value right now. The group recently reported adjusted earnings per share of 27.9p for the year ended 31 March, which at the current share price, places the stock on a trailing P/E ratio of just 7.5. In contrast, the FTSE 100 index has a median trailing P/E ratio of 16.9.  

BT also offers a very high yield at present. The company recently declared a full-year dividend of 15.4p per share, which equates to a trailing yield of 7.3%. That’s far higher than the FTSE 100’s median trailing yield of 2.7%. These metrics suggest that BT shares are very cheap on a relative basis.

However, when analysing a stock, it’s important to look beyond valuation, as that is only one piece of the puzzle. It’s also important to consider other factors, such as the company’s financial strength, and the stock’s momentum. So let’s dig a little deeper.

Debt pile

One thing that concerns me about BT is the company’s huge debt pile. At 31 March, the group had total long-term debt of around £12bn on its balance sheet. Equity on the balance sheet was around £10.3bn. That gives a debt-to-equity ratio of 1.2, which is not particularly healthy. For example, Warren Buffett prefers to see a ratio of under 0.5.

A company with low debt has the flexibility to navigate the ever-changing business environment. On the other hand, a company with high debt can get into trouble when business conditions are challenging. BT’s operating profit was only six times its interest expense last year which doesn’t leave a huge margin of safety should profits deteriorate.

Furthermore, BT still has a massive pension deficit of £11.3bn on its balance sheet, which shouldn’t be ignored. The group recently agreed a 13-year ‘recovery plan’ with the trustee of the pension scheme, yet it plans to issue more debt to plug the deficit. The high level of debt and its pension deficit add considerable risk to the investment case, in my view.

Earnings downgrades

It’s also worth noting that the shares have a significant lack of positive momentum at present. The stock appears to be stuck in a strong downtrend, and City analysts are still downgrading their 2019/20 earnings estimates for the company. Over the last month, analysts have downgraded their FY2019 earnings estimates by around 4%. That’s not a good sign and means that the stock could potentially continue to trend down. Ideally, you want to see analysts upgrading their estimates, as this can have a positive impact on a company’s share price.

Weighing up these factors, I’m not convinced BT shares are a bargain right now, despite the stock’s low valuation. I think there are better opportunities within the FTSE 100 at present, including a few of the stocks listed in the free report below.

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 considered so you should consider taking independent financial advice.

Edward Sheldon has no position in any 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

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

UK shares are cheap! So why is Warren Buffett ignoring them and should you too?

Many British shares are trading cheaply and pay dividends. This is normally the hunting ground for Warren Buffett, yet he's…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

How I’ve increased my passive income by 600%

Finding the right opportunities can bring spectacular results. Here’s how our author has managed to increase his monthly passive income…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Could lithium shares make my Stocks and Shares ISA a goldmine?

Our writer is considering buying lithium shares for his Stocks and Shares ISA. Here, he outlines the decision process he…

Read more »

British Pennies on a Pound Note
Investing Articles

Is now a great time to start buying penny shares?

Are stock markets set for a rebound? If they are, there are plenty of penny shares around that might be…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Can the Lloyds dividend survive a recession?

The Lloyds dividend has been growing strongly. But its history is more alarming. Christopher Ruane explains why he sold his…

Read more »

Electric cars charging in station
Investing Articles

I’m buying this under-the-radar income stock with explosive growth potential

Our author thinks he’s found a winning lithium stock that’s flying under the radar. It’s a steady income stock that…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Are Rolls-Royce shares finally about to climb?

Rolls-Royce shares have been falling again. But I can't see that much has changed, and the full-year outlook still appears…

Read more »

Serious puzzled businessman looking at laptop
Investing Articles

When should I sell my Scottish Mortgage shares?

Buying some Scottish Mortgage shares was an easy decision for me. But I've never been any good at knowing when…

Read more »