Can you double your money with BT shares?

The BT share price is trading at the lowest levels seen since 2009 following last week’s dividend cut. Are the shares now too cheap to ignore?

| 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

Ever since the Tell Sid privatisations of the 1980s, private investors have been buying BT Group (LSE: BT-A) shares for their dividends.

Unfortunately, last week saw BT announce plans to suspend its dividend for 18 months. The payout will then be cut by 50% to 7.7p from 2021–22.

As an income investor and a BT shareholder, I need to decide what to do. Is this a buying opportunity, or do I need to accept that I’ve made a mistake and sell up?

BT dividends: promise vs. reality

Mobile and broadband services are nearly as important as electricity and gas these days. So you might think that BT shares would be a reliable source of income, paying out regular dividends from predictable cash flows.

Unfortunately, it hasn’t turned out that way. BT’s dividend first reached 15p in 2000–01, during the tech boom. When the market crashed, BT cancelled its payout for a year and then restarted payouts at a much lower level.

By 2008, payments had climbed back to 15p. But once again, the market crashed. BT slashed its payout to just 6.5p in 2009.

History now seems to be repeating itself. BT’s dividend has remained stubbornly at 15.4p since 2017. I thought a cut was likely and even welcomed the idea. But I didn’t expect the company to cancel the dividend for 18 months and then cut it by 50% to 7.7p per share.

Why do BT shares keep crashing?

BT does have reliable revenue and decent profit margins. The firm’s accounts for the year to 31 March showed pre-tax profits of £2.4bn on revenue of £22.9bn. That gives us a pre-tax profit margin of 10%, which isn’t bad for a FTSE 100 firm.

Cash flow is quite strong, too. Normalised free cash flow for last year was £2bn, giving the stock an impressive free cash flow yield of 20%.

The problem is that this cash is all eaten up by the group’s spending commitments.

As the owner of mobile network EE, BT is spending heavily on upgrading to 5G. At the same time, the company is expanding its fibre broadband network.

Despite all of this spending, BT isn’t growing. The group’s revenue has fallen for three consecutive years. Last week’s results show that the rates being paid by most customers fell last year. If a business isn’t generating sales growth, it’s hard to generate profit growth except by cutting costs.

The situation is made worse by BT’s other liabilities. Net debt hit £18bn last year and the group also has a sizeable pension deficit.

BT shares could still be cheap

All the problems I’ve mentioned are well known and understood by the market. And to be fair, I think turnaround boss Philip Jansen has made the right decision by cutting the dividend.

If Jansen’s plans are successful, BT should become a more efficient and profitable business. The future dividend should be safer.

The stock’s trailing price-to-earnings ratio of five certainly leaves plenty of room for BT shares to rise. The dividend might also be worth waiting for. The planned 2021–22 payout of 7.7p per share would give a yield of about 7% at current levels.

I think BT shares are probably cheap. But I think there are probably better buying opportunities elsewhere at the moment. I’m not sure if I want to keep waiting for BT.

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.

Roland Head owns shares of BT GROUP PLC ORD 5P. 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

A pastel colored growing graph with rising rocket.
Investing Articles

Here’s how long it’s taken £1k of Nvidia stock to turn into £10k today!

Our writer explains how money invested in Nvidia stock less than three years ago has grown in value over tenfold…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
US Stock

3 red flags I’m seeing right now for the S&P 500

Jon Smith points out some concerns he has with the S&P 500 at current levels and picks one stock he's…

Read more »

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

UK dividend shares are outperforming US tech stocks!

UK dividend shares aren’t just for passive income investors. Over the last 12 months, they’ve been outperforming their US tech…

Read more »

DIVIDEND YIELD text written on a notebook with chart
US Stock

Here’s how much passive income an investor could make with £2k in Meta stock

Jon Smith looks at Meta stock from a different angle to normal, considering it as an option for an investor's…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

1 of my top UK shares is up 15% in a day! Is it still a buy for me?

Celebrus shares are soaring after strong full-year results. At a P/E ratio below 13, is it one of the best…

Read more »

Close-up of children holding a planet at the beach
Investing Articles

£10,000 invested in Jet2 shares 2 years ago is now worth…

Jet2 shares have surged in recent months and finally appear to be pushing towards fair value. Dr James Fox shares…

Read more »

piggy bank, searching with binoculars
Investing Articles

This FTSE 100 blue-chip could rise 26% in 12 months, according to brokers

While this FTSE 100 dividend stock has put investors through the wringer in recent years, some analysts see brighter skies…

Read more »

Businessman hand stacking money coins with virtual percentage icons
Investing Articles

A 3-step passive income strategy to target major wealth

Want to invest in the stock market to build up a passive income stream? There's no fiendlishly complex multi-step mystique…

Read more »