With US growth shares selling off heavily, my thoughts are turning to cheap FTSE 100 shares for their income potential.
Today I’ll consider BT (LSE:BT). It’s a FTSE 100 blue chip that could offer me tidy capital gains from share price growth, along with healthy income yield when dividends return.
The seismic shifts towards greater home working and online shopping and gaming in the wake of Covid-19 have underscored BT’s relevance. Its telecoms operations span the globe and it owns one of the UK’s fastest 5G mobile operators in EE.
EE, incidentally, has made some significant 5G spectrum purchases. In January 2021 it made superfast mobile data speeds available in 13 more UK towns.
Keeping up with rivals like O2 is not cheap, however. In its most recent financial results, BT reported that in the nine months to 31 December 2020, revenue dipped 7% and pretax profits were down 17% to £1.6bn. In the same time frame, capital expenditure was up 5%, due to the necessity of investing in its mobile and broadband networks to fight off growing competition.
Cheap FTSE 100 shares?
I could see such investment as a long-term boost to the BT share price. Rising costs do mean lower profits, though, so that’s a risk to consider.
But using the traditional value investing measurement, the price-to-earnings ratio, we can see one important thing. BT definitely falls into the basket of cheap FTSE 100 shares. The telecoms blue chip trades on a P/E ratio today of 6.9 times earnings. And forecasts show that in the next 12 months to March 2022 that P/E ratio is only slated to rise to 7.6 times earnings.
When we consider that the FTSE 100 index has an average P/E ratio of 21 times earnings, the bargain price here becomes clear.
BT shares have already climbed a whopping 54% in the past six months, jumping above 150p for the first time since February 2020. So is there more value to be had here?
BT hurt a lot of its fans when it cancelled its 2020 full-year dividend. To those that rely on that income, it didn’t matter that these were cheap FTSE 100 shares. But there is more optimism on the horizon.
CEO Philip Jansen has said his objective is to restart shareholder payouts in the next financial year to March 2022. Jansen believes BT can also afford a progressive policy — where dividends increase every year — beginning with a 7.7p per share payment.
That would give me a yield on today’s share price of 5.1%. I’d have to wait until next year before it starts, and there is a risk that profits won’t improve enough in that timeframe to get my payback for investing here.
When I invest for income, I try not to look at day-to-day or even month-to-month share price movements. I attempt to think with at least five-year time horizons in mind.
Zooming out, I can see that the BT share price has been in steady, long-term decline. In May 2016 the shares were trading at 450p, 65% above where they are now.
Full-year 2021 results due out on 5 May 2021. And those figures will probably give me more insight into whether these are truly cheap FTSE 100 shares or whether BT is a value trap. I don’t mind waiting.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
TomRodgers 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.