Commiserations if you’ve been holding shares in BT Group (LSE: BT.A) on the way down. After peaking close to 500p in late 2015 the slide to today’s level around 237p has been steady and relentless. My Foolish colleague Rupert Hargreaves set out some of the reasons driving the plunge in his September article, saying the company has been hated by regulators because of its monopoly position in the market, by customers because of poor service and high prices, by employees because of poor management, and by investors because of the poor performance of the shares.
Falling earnings
This year’s news that the firm set up a “more independent” Openreach Limited as a separate legal entity aims to ease concerns about the firm’s monopoly position. However, despite the new limited company having its own board of directors and strategy, the network assets are still owned by BT plc for land-contract reasons, and OpenreachLimited is 100% owned by BT Group plc, which is BT plc’s parent holding company. That means BT controls the company fully and can fire its directors at will. It all strikes me as a bit of a fudge that underlines the difficulties regulators face when dealing with BT, and I’m not expecting a miraculous change in the dynamics of the telecoms market in Britain as a result of these changes.
However, the main problem that has damaged the share price is that earnings have been falling, down around 9% in the trading year to March 2017, down 3% to March 2018 and projected to slip 6% in the current year and 2% to March 2020. There is nothing the stock market hates more than falling earnings. Indeed, if the slide isn’t arrested soon the firm’s big dividend yield could become threatened.
A vulnerable dividend
With his recent article, my fellow Fool Roland Head took a close look the dividend and he thinks “there’s a good chance that the group’s next chief executive will cut the payout when he or she takes charge later this year.” I think he may be right. When I last wrote about BT in August, I said: “Falling earnings don’t mix well with the firm’s big debt pile and pension obligations.” And Roland looked up the figures to reveal the company has net debt of £9.6bn, along with an £11.3bn pension deficit. He thinks some of the £3.25bn of pension contributions the firm has pledged to pay by March 2020 will come from additional debt. If that proves to be the case, I think it will be very hard for the directors to justify paying out so many millions to service such a large dividend.
Yet, since June the share price has been creeping back up and I reckon that could be down to value-seeking investors buying because of the low valuation indicators. Today’s share price close to 238p throws up a forward price-to-earnings ratio of a little over nine for the trading year to March 2020 and a forward dividend yield of 6.3%. But I’m not tempted. There is the risk of a cut in the dividend and if that happens the shares will likely fall further. I’d rather invest in an FTSE 100 tracker than in troubled BT.
