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Will the BT share price keep falling?

The BT Tower at night
Image: BT Group

The BT (LSE: BT.A) share price added around 44% between the beginning of January and the middle of June. However, since hitting a high watermark of about 200p in the middle of June, the stock’s retraced most of these gains. It’s currently changing hands around 160p. Over the past 12 months, it’s returned 44%. 

To understand why the stock’s performed so poorly since June, we first need to understand why BT shares rallied in the first half of the year. 

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The BT share price rises

In the first half of the year, shares in the telecommunications company rallied in line with other asset-heavy corporations. Investors were betting on higher inflation. In an inflationary environment, businesses like BT, which have a lot of physical assets and can increase prices in line with inflation, tend to perform well. 

As inflation expectations have moderated, the BT share price has started to give up its gains. At the same time, the company’s warned the market that its capital spending will rise this year, impacting profitability. 

These challenges have spooked investors. But I’m happy to look past the company’s near-term challenges and focus on its long-term potential. 

Moreover, trying to guess what the future will hold for macroeconomic factors such as inflation and interest rates is a fool’s errand. It’s impossible to forecast the future, and I’m not going to base my investment analysis on guesswork. 

Instead, I’ll be focusing on the group’s underlying fundamentals. In particular, I am excited by its growth potential over the next few years. 

Growth potential

BT is looking to spend £15bn on a rollout of full-fibre broadband to 25m premises by 2026. At the same time, it’s looking to reduce costs and cut its sprawling physical footprint from 300 to 30 sites across the UK.

These initiatives may provide a dual tailwind for the BT share price. Increased fibre connectivity should allow the company to increase fees charged to competitors using its network. This will help improve the top and bottom lines. At the same time, a reduced cost base will make the enterprise more efficient. Once again, this could boost the group’s bottom line. 

I’m also looking forward to the restoration of the company’s dividend. Analysts believe this will happen next year and have pencilled in a dividend yield of around 4.5%. However, this is only a projection at this stage. There’s no guarantee the enterprise will hit the target. 

The company could perform well in an inflationary environment, but it would almost certainly increase costs. Wages will increase and so would the cost of construction for new fibre broadband projects. This is probably the biggest challenge the organisation will have to deal with in the next few years. 

Unfortunately, this could mean the stock keeps falling if profits and margins remain under pressure. 

Despite this headwind, I’d make the most of the recent performance of the BT share price and buy the stock as a long-term investment. 

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Rupert Hargreaves 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.

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