The BT share price soars by 10%. Here’s why I think the FTSE 100 giant can’t be ignored

BT plc (LON:BT-A) jumps as earnings beat expectations. Despite a cut to the dividend, this Fool still thinks the shares are a great buy for income investors.

| 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

Stock in telecommunications behemoth BT Group (LSE: BT-A) rocketed in early trading this morning as market participants responded positively to the latest interim numbers from the FTSE 100 firm.

With the share price finally starting to show signs of a sustained rebound, should previously reluctant investors — particularly those focused on generating income from their capital — now think about adding the stock to their portfolios? I think so.

“Encouraging results”

Reported pre-tax profit and adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) came in at £1.34bn and £3.68bn respectively over the first half of BT’s financial year as a result of costs being trimmed and higher volumes of expensive smartphones being sold by its consumer business. The pre-tax profit number was an increase of 24%. 

Elsewhere, the company stated that it continued to see improvement in customer experience metrics, an increase in the speed of ultrafast broadband being deployed and “positive progress” in transforming its operating model.

It wasn’t all good news, however. At £11.59bn, reported revenue was 2% lower over the six months to the end of September with BT’s consumer arm impacted by price reductions at Openreach and relatively poor performance at its enterprise business. Free cash flow also fell 22% to £974m, partly as a result of capital expenditure climbing by £140m to £1.83bn.

Having labelled today’s numbers as “encouraging“, outgoing CEO Gavin Patterson reflected in his statement to shareholders that the company was beginning to see the benefits of its strategy to “simplify and strengthen the business and improve efficiency“.

He went on to remark that guidance on the full year hadn’t changed and that, despite growing pressure from rivals, BT still expected EBITDA to be in the “upper half” of the £7.3bn-£7.4bn range. 

Dividend star

For some time now, I’ve felt that the market was being too harsh on BT. Almost three years ago, the share price was close to breaching 500p. By May 2018, it had fallen to as low as 203p — a reduction of just under 60%. Even today, the shares still change hands on a fairly cheap price-to-earnings (P/E) ratio of 10.

Despite the fact that BT’s new leader will be paid more than his predecessor (whose remuneration was already a contentious issue among shareholders), I’m also optimistic about the arrival of ex-Worldpay boss Philip Jansen next year. While increased competition and a sizeable pension deficit mean he will still have his work cut out, confirmation that the company will not be spinning off Openreach, despite opposition from activist investors, does remove some uncertainty, at least in the short term.

Arguably BT’s biggest draw, however, remains its dividend. Today, the company announced an interim payout of 4.62p per share or 30% of last year’s total cash return to shareholders (15.4p). That’s a cut of 4.7% from the 4.85p given back to owners in the previous financial year.

That’s not to say that income investors should be unduly worried. Assuming analyst projections are correct, BT is expected to hand back 15p per share in 2018/19. Taking today’s share price move into account, that leaves a yield of around 5.7%. Given that interest rates are unlikely to rise significantly any time soon, that’s certainly not to be sniffed at. Despite the aforementioned fall in free cash flow, payouts will also likely be covered 1.7 times by profits, which is an improvement on last year.

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.

Paul Summers 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

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

How much passive income could a £20,000 ISA provide in a year?

A diversified portfolio of high-yield FTSE shares can build a large and reliable passive income over time, as Royston Wild…

Read more »

Three generation family are playing football together in a field. There are two boys, their father and their grandfather.
Investing Articles

See how much an investor needs in an ISA to fund an £888 monthly passive income

Harvey Jones grabs his calculator to work out how much money people need to generate a decent passive income in…

Read more »

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

The BP share price is climbing – see how much £10k invested 1 month ago is worth now

It's been a tough few years for the BP share price. Harvey Jones examines whether the FTSE 100 oil giant…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

Nvidia stock has soared 1,471% in 5 years. Here’s how I’m hunting for the next Nvidia!

Nvidia stock has put in a stunning performance over the past five years. This writer tries to apply some lessons…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

If someone decided to start buying shares with £10k a year ago, here’s what they could be sitting on now!

If someone had started buying shares a year ago with £10k, what might have happened? Our writer outlines some factors…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

The Rolls-Royce share price is close to an all-time record. Could it still be a bargain?

The Rolls-Royce share price has been punching out the lights of late. Our writer thinks things could get even better…

Read more »

4 Teslas in a parking lot at a charger station
Investing Articles

The Tesla share price slips further — how much would £10k invested at the start of the year be worth now?

The Tesla share price remains under pressure, with risks mounting from multiple directions. Here’s what a £10,000 investment would be…

Read more »

British pound data
Investing Articles

The Ocado share price is a sea of red! Time to cut my losses?

Every time Harvey Jones checks out the Ocado share price, he sees red. Will it ever stop falling and leaving…

Read more »