BT (LSE: BT.A) shares haven’t performed well in recent years. Its share price has shown signs of life in 2021, rising from 135p to 170p. However, over a five-year timeframe, the stock is still down about 60%. That’s a disappointing result for long-term holders.
Can BT’s share price recover in 2021? Let’s take a look at the outlook for the FTSE 100 telecommunications stock.
BT shares: can they bounce back?
Looking at BT today, I’m cautiously optimistic on the outlook for the share price. There are several reasons why. The first is that management appears to be relatively confident about the future.
In its full-year results for the year ended 31 March, BT advised that a number of uncertainties (the Wholesale Fixed Telecoms Market Review, the 5G spectrum auction, its triennial pension valuation, etc) have now been removed. It also said that after a number of years of tough work, it’s now pivoting to “consistent and predictable growth.”
Of course, at this stage, there’s no guarantee BT will achieve the growth it’s talking about. The optimism from management is encouraging, nevertheless.
Secondly, broker sentiment towards the stock has improved recently. In late March, for example, BofA Global Research upgraded BT shares to ‘buy’ from ‘neutral’, citing the stock’s attractive valuation and expectations for growth. BofA also raised its price target to 200p, from 160p. More recently, on 6 May, Barclays raised its price target to 190p, from 170p.
Zooming in on BT’s valuation, it’s certainly low. Currently, BT sports a forward-looking price-to-earnings (P/E) ratio of about 8.1. That’s well below the FTSE 100 median of 16.8. If BT can execute on its plans, we could see its valuation increase.
Finally, it’s worth noting that CEO Philip Jansen bought 1.25m BT shares last week (spending about £2m). This is very encouraging, in my view. Insiders don’t buy company stock if they think the share price is set to go down. Clearly, Jansen – who’s likely to have a good read on the company’s performance – is optimistic in relation to the prospects for BT shares.
Putting all this together, I think there’s certainly a chance that BT’s share price could continue to recover in 2021 and beyond.
Should I buy BT today?
Having said that, BT isn’t a stock I’d buy for my own portfolio today. One reason is that BT hasn’t been a very profitable business. Over the last three years, its return on capital employed (ROCE) – a key measure of profitability – has averaged just 7.5%. That’s quite low. Over the long term, a stock’s return tends to be quite similar to its ROCE. This means that, in the long run, BT shares aren’t likely to generate strong returns.
Another reason is the company has a weak balance sheet. At 31 March, it had net debt of £17.8bn on its books. This adds risk to the investment case. Finally, BT’s dividend track record’s patchy. I like companies that have good long-term dividend growth track records.
Overall, I just don’t see BT as a ‘high-quality’ company. So, I’ll be leaving the stock alone for now. All things considered, I think there are much better stocks I could buy.
