Over the past couple of years, BT (LSE:BT-A) shares haven’t exactly been the best investment. But following a change of strategy, this historically underperforming stock appears to have turned over a new leaf. In the last 12 months, it’s up almost 40%. And so far, 2022 has continued this upward trajectory, with BT shares climbing a further 10%.
What’s behind this new-found momentum? And should I be considering this business for my portfolio?
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The bull case for BT shares
The company has suffered from poor leadership, bad capital allocation decisions, and a weakening grip on its market share for a long time. At least, that’s what I’ve seen. But it seems management has finally started doing something about it because recent trading updates have been quite impressive.
With accelerated deployment of its fibre-to-the-premises (FTTP) infrastructure across the UK, BT looks to be on track to hit its 25 million homes target by 2026. Meanwhile, the firm’s rollout of 5G now covers 40% of Britain’s population, with 5.2 million customers taking advantage of the new mobile network.
Despite this progress, pre-tax profits in its latest half-year report were flat. This was primarily due to customers upgrading from legacy products rather than increasing their spending. However, this bottom line could soon expand as operational cost savings are introduced. In fact, management recently accelerated its £2bn annualised savings target from 2025 to 2024.
With that in mind, I’m not surprised to see BT shares make a U-turn. And if its leadership successfully hits its milestones throughout 2022, I believe the stock could continue to climb from here.
Taking a step back
As encouraging as the recent progress is, I still have some reservations about this business. More specifically, its balance sheet.
Over the years, BT has racked up a significant amount of debt to maintain its infrastructure, as dwindling profits could not keep up with capital expenditure requirements. While this may potentially no longer be the case in the future, having nearly £23bn of debt racks up quite a large interest bill.
Getting deeper into the numbers, between March 2020 and 2021, the company paid £714m in interest on its loans. At first glance, the £2.5bn of operating profits appear to cover this. However, when considering the £2.1bn of lease obligations, the spare capital suddenly dries up.
That suggests the company will remain dependent on external financing until the bottom line can expand. Needless to say, taking on more debt only increases the pressure. And with interest rates already on the rise, profit margins could be in for a tumble.
The bottom line
All things considered, I’m not tempted to add this stock to my portfolio. While I think it’s plausible for BT shares to continue rising throughout 2022, the weak balance sheet could cause bigger problems in the long run. Therefore, I believe there are far better opportunities to be found elsewhere.