BT Group (LSE: BT-A) is meant to be a reliable, sensible income stock that pays a steady dividend and does not cause sleepless nights.
But over the last five years, the BT share price has fallen by 50% and the likelihood of a dividend cut has grown.
My colleague Edward Sheldon recently calculated the investment losses suffered by BT investors over the last five years. It’s a pretty grim read. But I think there’s better news ahead for existing shareholders and new buyers.
Today I want to take a closer look at the company’s plans and the outlook for the dividend under new boss Philip Jansen.
Are things improving already?
I’ve been looking at BT’s accounts for the last few years. And the numbers suggest to me that the company’s performance may already have started to recover.
Here’s how sales and profits have changed since 2015:
|
Year |
2015 |
2016 |
2017 |
2018 |
2019 |
|
Revenue |
£17,840m |
£18,879m |
£24,082m |
£23,746m |
£23,459m |
|
Pre-tax profit |
£2,567m |
£2,907m |
£2,354m |
£2,616m |
£2,666m |
These figures highlight some interesting trends.
The good news is that the group’s annual profits have been rising since 2018. Because sales have been almost flat (-2%) since 2017, BT’s rising profits mean that the group’s profit margins have also risen. This is generally good news.
However, companies with falling sales generally find it difficult to deliver sustainable growth. This is one of my main concerns with BT at the moment. It’s not yet clear to me what will stimulate a return to growth.
Fibre + 5G
One possibility is that renewed investment in fibre broadband and 5G mobile will persuade more customers to sign up for the firm’s most expensive services. The company has now launched 5G mobile in over 20 cities and towns and is expanding the reach of its fastest fibre services.
BT is also investing in its customer service, with new high street stores and UK-based call centres. There’s also an ongoing modernisation programme that’s expected to generate annual cost savings of £1.1bn.
Taken together, I think these measures could provide a sustainable improvement in the group’s profitability.
What about the dividend?
To get a quick idea of whether a dividend is affordable, the standard approach is to compare the payout with the company’s earnings per share. What we want to see is that earnings are higher than the dividend payout. This is known as dividend cover.
BT’s dividend cover has fallen from 2x in 2015 to just 1.4x last year. This isn’t ideal, but the dividend is still covered. The only problem is that investment in fibre broadband and 5G is expensive. With debt rising, I feel that BT could really do with a little extra cash.
City analysts seem to agree. Their latest forecasts suggest that the payout will be cut by 20% to 12.2p for the 2020/21 financial year. That would give a dividend yield of 6% at the current share price.
My view
Dividend cuts are never great news. But they’re sometimes needed. With BT shares now trading on just 8.5 times forecast earnings, I think the bad news is in the price.
In my view, the outlook is improving. In five years’ time, I’d hope to see the share price above 300p, with the dividend restored to growth. I rate BT as a contrarian buy.
