BT share price activity
As I write, BT shares are trading for 154p. At this point last year, they were trading for 109p. In the space of 12 months the share price has increased over 40%. More tellingly, however, the BT share price has slumped since the end of June to current levels. On 25 June, the shares were trading for 204p. In the space of nearly three months, the shares have dropped nearly 25% in value.
Why I’m avoiding BT shares
I have pinpointed three specific reasons as to why I would be inclined to avoid BT shares for my portfolio just now.
1. Dissecting the BT share price, it looks a bit expensive in my opinion. It is currently trading with a high price-to-book (P/B) ratio of close to 140. In contrast, its price-to-earnings ratio is closer to 15, which I think is a bit more realistic. All this tells me is that both ratios, which deliver insight into a share’s relative value, are distorted. As a potential investor, this does not sit well with me.
2. Looking at the historic BT share price, I see levels surpassed 500p in 2015. At that time, the FTSE 100 incumbent was in the middle of an expansive growth plan. One of its biggest growth avenues was its television arm. Market share in the TV sector became hard to come by and the broadband market was severely competitive resulting in its share price decreasing massively. In BT’s recent Q1 report, revenues were down by 3% although EBITDA and cash flow were up. I was more concerned with the outlook. Lots of money will be used for 5G infrastructure and although good for the long term, in the short term investors may not see a dividend! That puts me off from investing as I want my investments to make me a passive income.
3. Finally, as I mentioned, there is a potential of no dividend meaning BT shares may not make me a passive income. In fact, last year, BT did eliminate its dividend, which used to be higher than the consensus FTSE 100 average of 3%. I am not saying dividends will never return, but there is a huge risk of no dividend in the short-medium term, which puts me off.
A positive development
Despite my bearish stance towards the BT share price, I must note a recent positive development. Last month, BT announced Adam Crozier as an independent non-executive director and chairman. This is a good move in my opinion. Crozier has a positive track record of turning around ailing firms. A recent example is his time at ITV. This experience could help boost BT in the longer term.
Overall, there are aspects of BT that I like and believe could benefit the BT share price over time. Right now, the negatives outweigh the positives for me, so I would not invest in shares in BT for my portfolio. I will keep a keen eye on developments, however.
Jabran Khan 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.