BT Group isn’t the dirt-cheap FTSE 100 7%-yielder I’d buy today

Looking for a better FTSE 100 (INDEXFTSE: UKX) dividend pick than BT Group plc (LON: BT-A)? Then step this way.

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Of all the high-yielding stocks currently populating the FTSE 100, in my opinion BT Group (LSE: BT-A) is one of the worst investors could pick to plough the cash into.

Although its share price has stabilised just above 200p since I last covered it in May, I wouldn’t bet against the telecoms titan extending its multi-year southwards march as City brokers steadily slash their earnings estimates.

Indeed since last month’s article, the Square Mile consensus has fallen again, the number crunchers now expecting BT’s profits reversals to endure through to the close of next year at least (falls of 5% and 1% are now anticipated for the years to March 2019 and 2020, respectively).

In big trouble

Reflecting sustained earnings drops in recent years and a stretched balance sheet, BT was forced to trash its progressive dividend policy and keep the dividend locked at 15.4p per share.

Some City analysts are expecting BT to reduce the dividend in response to reduced earnings, and current consensus points to payouts of 15.3p and 15.1p for fiscal 2019 and 2020. However, I think that these rewards are likely to fall much more sharply, thus rendering a yield of 7.1% through to the close of next year irrelevant.

As my Foolish colleague Edward Sheldon recently pointed out, investors need to pay particular attention to BT’s massive debts.

Concerns over its stretched balance sheet and its colossal pension black hole have been rumbling on for many years now.  But with the revenues rot worsening (turnover declined steadily through the last year, and a 3% drop in the fourth quarter compared with growth of 1% in the first three months of fiscal 2018); the business forced to fork out increasingly-large sums to deal with its debt and pension deficit; and recent regulatory decisions affecting Openreach exacerbating its already-bloated capital expenditure bill, BT is in a particularly sticky spot right now.

Some would argue that these troubles are baked into the company’s mega-low prospective P/E ratio of 8 times, particularly as BT is making strategic changes that will see it improve its product offerings and the customer experience as well as take down its cost base. I would disagree, though, and reckon there’s still plenty of scope for the firm’s share price to keep on tanking.

If I were scanning the FTSE 100 for big dividend payers trading at rock-bottom prices I would be much happier buying into construction colossus Barratt Developments (LSE: BDEV).

Political pressure continues…

Now Barratt isn’t without risks of its own. Arguably the troubles facing the housebuilding sector could be seen as growing by the day given that government handling of the upcoming Brexit seems to be getting more and more confused, not less.

The fight to secure the kind of EU departure that Theresa May wants is intensifying by the day as the prime minister frantically battles her cabinet and her Conservative backbenchers on both sides of the Brexit divide. A little over nine months until the UK leaves the bloc, all options, from a catastrophic ‘no deal’ Brexit to a prolonged transition period lasting many years, remain very firmly on the table.

The consequences of this impasse, and the possibility of prolonged uncertainty lasting years, not months, of course threatens to play havoc with the domestic economy. And on paper at least this is likely to have a significant impact on the housing market, one of the key measures when it comes to gauging a nation’s economic health.

… but new-build demand is still rising

The fallout of 2016’s EU referendum has already had a devastating effect on Britain’s housebuilders, with reduced homebuyer appetite putting paid to the gigantic property price rises of yesteryear and thus the prospect of double-digit annual earnings increases continuing over at the likes of Barratt.

Indeed, City analysts are predicting that profits expansion at this one Footsie business will decelerate to 5% in the 12 months to June, as well as in the following year.

While those seeking exploding earnings in the future may well end up disappointed, I am fully expecting Barratt (and most of its peers) to continue doling out market-smashing dividend yields. House prices are still growing — latest Rightmove data this week showed average property values in the UK edge 0.4% higher in June, the third monthly climb in a row — thanks to the country’s massive homes shortage.

And this phenomenon is driving demand for new-build properties in particular ever higher. Barratt reported recently that “trading is strong” with total forward sales up 2.5% as of May 6, standing at an all-time record of £3.29bn. What’s more, the company also looks set to purchase 20,000 plots in the current year (and up from 18,497 plots last time out) in order to capitalise on this ripe trading environment.

Yields leap to 8.5%

The latest trading update also gave additional legitimacy to City predictions of bumper dividends this year and next, Barratt advising that its net cash position as of the close of June “is expected to be better than previous guidance at around £550m.”

Analysts are currently expecting full-year dividends at the builder to gallop to 43.3p per share in the outgoing year from 41.7p in fiscal 2017, and then to 44.8p in the following period. This means that Barratt sports eye-popping yields of 8.3% and 8.5% for this year and next.

These readings not only surpass those of BT, but Barratt also matches the communications giant’s earnings multiple. The housebuilder also currently sports a forward P/E ratio of 8 times, this being in spite of its far-superior profits outlook.

All things considered, I believe Barratt is a much better blue chip selection than BT today. But it isn’t the only Footsie share out there that could make you a fortune…

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.

Royston Wild owns shares in Barratt Developments. 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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