The BT (LSE: BT.A) share price is rising once again. The telecoms company appears to be beginning a modest recovery, after it collapsed with the rest of the FTSE 100. BT’s dividend is now yielding around 13%, up from 9.4% in February.
BT purchased EE, the wireless carrier, in 2016. This acquisition gave the company a monopoly on network access in the UK market. It is the only UK telecoms operator able to offer wireless and fixed-line services without leasing its network access. On the face of it, what’s not to like?
The BT share price has underperformed
Looking at BT’s share price over the last five years, you’ll see a steady drop in value from its 2016 peak. The firm’s shares are currently worth around 116p. This is back where it was in 2009.
BT has significantly underperformed the FTSE 100 over the last five-year period. In my view, any gains from it’s EE purchase have been frittered away.
BT has not capitalised on its monopoly position either. The firm hasn’t managed to overcome the challenges of new competitors. And it also appears to struggle with regulatory and operational burdens.
Some analysts believe the firm to be moving slowly in the right direction. If that is the case, I think progress is much too leisurely and is reflected in the declining share price.
Adding to BT’s woes, is the UK’s Huawei dilemma. Much of BT’s current infrastructure depends on Huawei equipment. The UK government’s cap on the use of Huawei in the newer 5G network is estimated to cost the firm £500 million over the next five years. This is adding to the downward pressure on BT’s share price.
Downhill financial performance (H2)
Some analysts describe BT as a ‘top FTSE dividend share’. This is mainly due to its attractive dividend yield and monopoly position. However, the yield is attractive because the share price is falling. Unlike many FTSE 100 firms, this is not solely due to the recent crash.
A closer look at BT’s financial statements shows its peak performance to correlate with its purchase of EE. And it’s been downhill since then.
A write-down in asset values occurred in 2017. This was due to an accounting scandal in the firm’s Italian division. At the same time, turnover, operating profits, and earnings per share dropped, and continue to do so.
BT has consistent ‘exceptional item’ expenses which make me wonder how exceptional they really are. Since exceptional items are not included when calculating operational profit, the declining profits may be higher than they should be.
And while I’m talking about accounting, changes in standards brought BT’s off-balance-sheet financing onto the balance sheet in 2017. The results were inflated EBITDA but also higher gearing.
As for that 13% yield, profits are dropping and debt is increasing. It’s easy to see why the dividend growth rate has been declining year on year since 2016. Unless BT can make faster changes to its model, this will likely continue.
Incredibly, the average broker recommendation on BT shares is a buy. With this in mind, if I had the shares in a portfolio, I’d continue to hold them. But I won’t be buying them anytime soon.
