Over the past five years, shares in BT Group (LSE:BT.A) have not been performing very well. Can 5G change all that?
BT is already heavily involved with bringing the new mobile network online around the UK. There are currently over 110 towns and cities with access to 5G, and the recent partnership with Belfast Harbour is only going to increase that figure.
Despite this good news, the BT share price is still nowhere near its high of nearly £5 almost five years ago. Will it ever recover?
A 5G opportunity?
If you aren’t fully aware of how large BT Group is, the telecoms infrastructure company owns and manages all of the UK’s core fixed network. In addition to that, it is also the largest broadband provider, serving 35% of the British population using one of its several brands – namely BT, EE, Plusnet, and Openreach.
Just like it with 4G, BT is taking on the challenge of getting its infrastructure updated to support 5G-based communications. But this process is quite expensive and not going as smoothly as initially anticipated. For example, the government’s decision to limit Huawei’s involvement in developing 5G is estimated to cost BT an additional £500m.
Despite these setbacks, 5G coverage is expanding outside of major cities. It certainly is an expensive process, but with most mobile companies’ piggy-backing off BT’s network, these expenses may be justified.
BT Group has a serious debt problem
While there are numerous reasons for BT’s poor performing stock price, the most prominent is its debt situation. Keeping up with costs for maintaining, improving, and running its communication network pushed management to borrow money. A lot of money.
To me, BT is a classic case of a business being hellbent on growth, without realising it’s destroying shareholder value rather than creating it. Today, almost 70% of the firm’s capital structure is debt. The levels are so high that it owes more money than the total value of the company!
Debt can be a powerful financing tool if used correctly. It’s a perfectly acceptable way of raising capital to invest in new projects. The problem is that these projects eventually need to make money, and in the case of BT, they are simply not earning enough.
Over the last five years, BT’s profits have declined by 30%. Meanwhile, debt levels have been rising, and with it, interest payments. As of March 2020, 24% of underlying profits is being used to cover debt interest. It doesn’t help matters that previously deferred income taxes are now coming due, adding even more pressure to the bottom line.
The bottom line – can 5G save BT Group?
5G may rejuvenate BT Group. The network is up to 100 times faster than 4G, and a boost of this magnitude sounds quite enticing. So much so that it’s likely to attract many new customers to one of BT’s brands.
However, the firm has over £27bn of long-term obligations to repay with interest. If 5G fails to attract enough new customers, then I fear that BT will continue its downward trend to insolvency.
For that reason, it seems more like a gamble rather than an investment to me, so I won’t be buying any shares any time soon.
