Forget the 2020 stock market crash — BT Group (LSE: BT.A) shareholders have been suffering for far longer. The BT share price chart over the past five years shows a steady, seemingly inexorable, decline. We’re looking at a five-year fall of 79%, with the bulk of that coming before the Covid-19 pandemic struck.
The price fall closely echoes BT’s earnings per share, which have fallen for four straight years up until March 2020. And a 20% drop currently forecast for the current year would even accelerate that if it turns out to be accurate. But on the current BT share price, that would take us to a price-to-earnings multiple of only around 5.5, which I reckon is cheap.
Now, I do think BT stock deserves a relatively weak rating right now. But not that low. I reckon the current valuation is suffering extra depression due to the current bear market, and in my view, it seriously undervalues BT’s long-term prospects. But those prospects could already be starting to turn.
BT suspended its dividend this year, after slashing it by 70% last year. And that didn’t help the BT share price either. Prior to that, the company was stubbornly paying out 15.4p per year, while its earnings were falling and it was struggling under a heavy debt burden. Why, oh why, do companies do that? Why don’t they cut back their dividend expenditure as soon as they know they can’t really afford it? Answers on a postcard please, though I’m sure it’s all about short-termism.
Will rising earnings boost the BT share price?
Still, the dividend cutback might be short-lived. In a first-half update, BT said that its upgraded EBITDA outlook “underpins planned reinstated dividend from 2021/22“. The firm says it expects to record an EBITDA figure of between £7.3bn and £7.5bn this year, and at least £7.9bn in 2022/23.
Chief executive Philip Jansen predicted “sustainable growth from this level forward“. He added: “This growth will be driven by the continued recovery from Covid-19, enhanced by sales of our converged and growth products, and by significant savings from our modernisation and cost saving programme“.
I see this as good news. But in the days since the update, the BT share price has gone nowhere. And it’s still been on a gentle but downward trajectory in recent months. So why aren’t investors buying now?
All eyes might still be on the debt
While the dividend news might seem upbeat, I see debt as a bigger priority. Net debt dropped a little by the H1 stage, from £18.3bn a year previously to £17.6bn. That’s welcome, but it’s still a humungous amount of money to owe. It’s close to 1.8 times the total market valuation of BT right now.
I would have preferred to see more priority being put on further debt reductions, and less readiness to use what cash BT has to line shareholders’ pockets in the short term. It is, after all, a company that needs to spend shedloads to maintain its 5G expansion programme.
But, even with my misgivings over debt, I’m still firmly convinced the BT share price is too low. I’d buy for the long term.
