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Debt might be killing the BT share price, but here’s why I’d buy

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Investing in BT Group (LSE: BT.A) isn’t for the faint-hearted. No, there’s plenty of risk involved. But, at times like these, brave investors who will take a bit of risk can reap handsome rewards. The BT share price has now fallen 48% in 2020, and the big question is whether it’s gone too far.

The price chart is discouraging in more ways than one. Many FTSE 100 shares dipped when the lockdown started, but most have pulled back a bit. And while the index is down 23% now, it’s still significantly higher than at its low point in March. But it’s not like that for BT. No, instead of any recovery, the price has just continued on down.

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It’s perhaps hard to see why the Covid-19 pandemic has wreaked such damage on BT. It is, after all, a company that provides services that shouldn’t really be too badly affected. But the coronavirus isn’t really the problem. No, that’s just exposed the vulnerable state of BT’s balance sheet. And that, in turn, has given the shares an extra kicking while they were already down.

BT share price hit by earnings

BT has been suffering from falling earnings for the past few years, which I put down largely to previous over-ambition. The company got into bidding wars for content that it simply couldn’t afford. And that led to an escalation of one of BT’s biggest long-term problems — debt.

At the last count, on 30 June, BT’s net debt stood at a little over £18bn. That was about 2% up on the same point a year previously, and a rise is in debt is never a happy thing. But given our 2020 economic circumstances, I don’t think it’s too bad. It is, however, holding back the BT share price.

New brooms sweeping clean?

I reckon BT has badly needed a cultural change for years. But I do believe that change is underway, and I see it having been kicked off by the arrival of Philip Jansen as chief executive in February 2019. I’m further encouraged by the appointment of Rob Shuter as CEO of the company’s Enterprise unit. He’ll take on the role by the end of the current financial year.

When might we see the BT share price improving? Any effect of management changes will take some time to work through. But I expect to see a tighter ship in the future. Analysts are cautiously optimistic, indicating a 4% rise in EPS for the year to March 2022. Now, that’s no return to big earnings growth. And we do face predictions for a 20%+ fall for the current year.

A turnaround in the air

But I believe we’re seeing an opportunity now to halt the BT share price slide and turn things round. One thing I’ll be watching for is how the company handles its dividend. BT suspended it for Covid-19 year, and forecasts suggest a return to half the previous level next year. I’d think there’s scope for even less than that while still providing some reasonable income, but we shall have to see.

Meanwhile, on forward P/E multiples of only around six, I rate BT as a buy. But only with a relatively small amount of cash, and with acceptance of the risks.

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Alan Oscroft 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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