BT (LSE: BT.A) shares are cheap at the moment. After a recent price fall, the stock now sports a forward-looking price-to-earnings (P/E) ratio of just 7.7. By contrast, the median P/E ratio across the FTSE 100 index is 15.6.
Should I buy BT for my portfolio on the back of this low valuation? Let’s take a look at the investment case.
Should I buy BT shares today?
One thing to understand about cheap stocks is that they’re usually cheap for a reason. Often, cheap businesses have underlying problems and, as a result, large investors (ie the smart money) are happy to give them a wide berth.
Looking at BT, I can see a number of issues that could be putting investors off. The first is that there’s very little growth here. Over the last three financial years, revenue has fallen from £23.7bn to £21.4bn. This year and next, analysts expect revenue of £21.1bn.
Meanwhile, over the same period, adjusted earnings per share have fallen from 27.9p to 18.9p. This year and next, analysts expect earnings of 19.3p and 20.6p.
This lack of growth is a turnoff for me. I’ve found over the years that one of the easiest ways to make money from stocks is to invest in companies that are steadily increasing their revenues and earnings. Companies that have done this, such as Apple and Microsoft, have made me a lot of money.
Another issue is the group’s financial position. This looks precarious. At the end of March, BT had net debt of £17.8bn on its balance sheet. Given that BT currently has a market capitalisation of around £15bn, that level of debt’s very high. On top of this, BT also has a large pension deficit of around £8bn.
Generally speaking, a large amount of debt on the balance sheet is a bad thing because the interest payments can inhibit the company’s ability to build up cash. This can impact future growth as well as dividends.
Speaking of dividends, this is another area where BT comes up short. After reducing its dividend substantially in the 2019/2020 financial year, BT paid no dividend at all for the 2020/2021 year. However, the company has said it expects to resume payments in the near future.
Could BT’s share price rebound?
It’s worth pointing out that there are some things that could drive BT’s share price higher.
One is the recent appointment of chairman Adam Crozier. Crozier, who has previously served at Whitbread and ITV, has a good track record. He’s likely to focus on restructuring BT to make it more competitive in today’s digital age.
A takeover offer could also push the share price up. Recently, there have been rumours that Deutsche Telekom could be interested in buying BT Group. Altice, which owns 12% of the FTSE 100 company, is another business that’s been mentioned here.
All things considered however, I don’t see any appeal in BT shares right now to buy them for my portfolio. I think there are better stocks to buy today.
