BT axes dividends! Is the stock cheap enough to buy?

Last week Britain’s biggest telecoms provider BT Group (LON: BT.A) scrapped dividends, so does that reduce its appeal? Here’s what I’d do now.

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Passive income investors would have noticed the recent headlines that Britain’s biggest telecoms group BT (LSE: BT.A) has now suspended its dividend. Therefore today, I’d like to discuss what the news may mean for investors in the shares.

No dividends for now

On May 7, BT released Q4 and FY 2019/20 results. As part of the announcement, the board scrapped both its final 2019/20 dividend as well as all dividends for 2020/21. The group expects to start paying dividends again in FY 2021/22 with a potential amount of 7.7p per share.

Put another way, any future payouts will be at 50% of previous levels. It also means no annual dividend for the first time since its privatisation in 1984.

Management said the decision was taken to “create capacity for value-enhancing investments [and to] manage confidently through the Covid-19 crisis”.

So what can current, or potential, BT investors do now? Should they sell, hold, or buy the stock at this point?

Investors would need to answer this question in light of their risk/return profiles. But I’d like to highlight several points that may help them make better-informed decisions.

FTSE 100 member BT is the largest domestic provider of fixed-line, broadband and mobile telecoms services. The City is hoping that management will now use the amount saved to make the business truly competitive, including the rollout of cutting-edge fibre broadband and investment in 5G mobile services. 

Any decision you take should ideally be based on your views about the importance of the company nationwide. For example, it is now expecting to offer fibre to around 4.5m homes and businesses by March 2021. The number will likely reach 20m before the end of the decade. That aggressive target is 5m more than earlier estimates. And it’s interesting that JP Morgan Cazenove has recently reaffirmed its ‘overweight’ investment rating on BT shares, with a price target of 182p.

Finally, I also believe you may want to look back at the performance of the stock, say in the past five or even 10 years.

Past performance of BT shares

In early May 2015, the BT stock price was around 470p. Today it’s around 105p, although as 2020 began, the shares were worth around 196p.

The stock’s compound annual growth rate over the last five years was -25.9%. Put another way, £1,000 invested in the shares would have decreased to about £237.

Now, if we go back 10 years, the numbers would look somewhat different. In May 2010, the BT stock price was around 127p. 

So the stock’s CAGR over the last 10 years was -1.88%. In other words, £1,000 invested in BT would have decreased to about £827 (my calculation doesn’t include past dividends).

When we compare the two returns, there’s likely to be an argument to be made for long-term investing.

The bottom line on the stock

Year-to-date, the shares are down over 40%. I believe most of the bad news might already be in the price. I’d be a buyer of BT, especially if the price goes toward 90p, a level last seen in 2009. And then I’d look to be a long-term shareholder spanning several years, if not decades.

And if you’re a current shareholder, you may want to hold on to your position to ride the wave. 

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 considered so you should consider taking independent financial advice.

tezcang 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.

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