The last time the BT (LSE: BT.A) share price traded above 300p was in the middle of 2017. At the time, the stock was falling out of favour with investors.
Towards the end of 2015, shares in the telecommunications giant had surged as high as 500p, the highest level since the dotcom bubble. The company was in the middle of an expansion programme. It was spending billions building its pay-TV business and looking for other growth avenues.
At the same time, it looked as if BT’s fixed-line telecommunications and internet business would be a cash cow for the group for many years to come. This was good news for income investors and for the company’s formerly gold-plated dividend.
But as the group struggled for market share in the pay-TV market and competitors started to nip at its heels in the broadband market, investors became concerned. The BT share price reflected these concerns. And the worst-case scenario materialised last year when the firm eliminated its dividend to try and preserve cash in the pandemic.
Overall, between the end of 2015 and ended 2020, the share price lost nearly 80% of its capital value, excluding dividends.
BT share price past performance
When analysing any investment that has performed poorly in the past, I think it is always essential to understand why it has performed in that way. While investors should never use past performance as a guide to future potential, I think it is crucial to know where a company went wrong and how it has reacted to the errors.
In the case of BT, it is clear to me that the group overstretched itself. The battle for football broadcasting rights with Sky cost the business billions and distracted management.
At the same time, the group ignored its core customers. Rather than spending money on improving its telecoms network, BT spent money fighting Sky.
The battle for viewers also heaped more debt on the balance sheet. Net debt nearly doubled between 2015 and 2020 to a total of £18bn.
Put simply, BT’s growth plans did not work. It neglected its core customers and allowed its balance sheet to become significantly weaker than it was five years ago.
It is no wonder investors have been deserting its shares over the past few years.
Growth initiatives
The good news is, the company is trying to rectify its past mistakes. This is incredibly encouraging.
According to its financial results for the year to March 2021, the group’s capital spending totalled £4.2bn last year. Spending is expected to increase further this year to £4.9bn.
The company has realised that smaller, more nimble competitors such as Virgin Media and Cityfibre are stealing its lunch. They are laying their own fibre networks, which can bypass BT’s network. Providing network services through its Openreach division has historically been a cash cow for the group.
To overcome this issue, BT is spending heavily. Earlier this year, it announced an extension to its full-fibre rollout schedule and aims to target 80% of the population by 2026.
The benefits of this spending are already starting to show in the company’s results. The rent Openreach can charge other broadband providers for fibre connectivity is much higher than traditional copper cables. As a result, revenue from fibre-enabled products increased 15% in the group’s last financial year.
Debt falling
As well as this spending, the company has also reduced its debt obligations. Net debt fell from £18bn at the end of fiscal 2020 to £17.8bn at the end of 2021. This is not a huge reduction, but the figures are heading in the right direction.
Elsewhere, the group is making progress with its pension obligations. The last triennial valuation trimmed the size of its pension deficit to just under £8bn from £11bn. The firm is making regular cash contributions of £900m to cover this gap. The figure will drop to £600m in 2024.
And finally, BT has been seeking a buyer for its pay-TV sports business. Finding a partner to take on these obligations will help the company exit a market it has always struggled to occupy.
As well as the above, BT has also earmarked more funding to spend on customer service. One such initiative is the company’s £15 a month fibre broadband deal for families that receive government support.
Dividend potential
Considering all of the above, I think the company is heading in the right direction and has moved on from its past mistakes. The BT share price is starting to reflect this. It has risen nearly 60% over the past year.
The next step in BT’s recovery will be the restoration of the dividend. Analysts believe management will reinstate the payout alongside the company’s fiscal 2022 results. These will be published at the beginning of next year.
Initially, analysts expect the company to start with a distribution of 7.5p per share, around half of what it paid in 2019. Still, based on the current BT share price, that gives a dividend yield of 4.6%. There is no guarantee the enterprise will reinstate the payout at this level, of course.
Unfortunately, despite the company’s progress, I do not think the stock will return to 300p any time soon. To justify this valuation, the organisation would have to increase its earnings by between 30% to 40% from current levels. I am not saying that is impossible, but it will be a challenge.
The outlook for the BT share price
The company may continue to face headwinds as we advance. Potential headwinds include competition from other businesses in the sector and higher interest rates. If interest rates increase, the group would have to fork out more money to sustain its debt. Further, if inflation continues to rise, BT’s costs could increase substantially. Once again, this would hold back profit growth.
Still, despite these risks and challenges, I would buy the shares.
I think the BT share price looks cheap compared to its potential in the near term. It is currently selling at a forward price-to-earnings (P/E) multiple of just 8.5, which undervalues the business in my potential. A prospective dividend yield of 4.6% also appears attractive.
While I think the stock might struggle to return to 300p, I believe it is an attractive investment at current levels.
