I’ve followed BT Group (LSE: BT-A) for years. With my background in telecoms, it’s one I’ve long wanted to want to buy. But BT has never failed to puzzle me, to irritate me, and simply to do things I can’t make sense of. By turning my nose up at it, I’ve missed a strong recovery since the depths of the Covid-19 crash. Over the past 12 months, the BT share price is up a very nice 37%. But it’s still down 50% over five years.
How do my BT frustrations stack up? The company has long been a popular choice for dividend investors. After all, in the year to March 2019, BT stumped up for a fat yield of nearly 7%. The Covid years saw that halted, but I reckon it was long overdue. I think BT has been reckless with its dividends.
It’s all down to debt, which is massive. At the halfway point in 2021, BT’s net debt stood at £18.2bn. Yes, more than eighteen billion pounds — it’s worth spelling it out. That’s about equal to BT’s entire market cap. So if I bought BT shares today, I’d be buying half company, half debt.
Oh, hang on, it’s worse than that. There’s the pension fund deficit too. The last triennial valuation put it at £7.87bn at 30 June 2020. I don’t think a company should be shoving the biggest dividends it can into investors’ pockets when shouldering such huge liabilities.
Investor optimism
But investors, largely, don’t seem too worried about balance sheet, debt, deficits, and unpleasant things like that. No, they seem to be going mainly on the company’s operational outlook. And on that basis, I don’t think things look too bad. The BT share price gains of the past year suggest a lot of investors think the same.
There’s a modest trailing price-to-earnings of eight, which looks low. Admittedly, it comes after a number of years of falling earnings. But BT reckons it should halt any decline in EBITDA this year, expecting to post a 1% improvement. But even if it doubled to 16, it would still look modest by FTSE 100 standards.
Guidance does still suggest a 5% fall in pre-tax profit due to finance expenses. But if we really are at a turnround point, I think we might be close to a return to rising earnings. And when a company like BT gets back on the upward path, the investors often flock back.
Can the BT share price double?
Will it be enough for the BT share price to soar? I think that would depend partly on where the dividend yield goes, and BT has already announced an interim payment this year. If the full-year payout is big enough, I reckon we might see a significant uprating of the shares.
But then, of course, dour pessimists like me, with our obsession with sound balance sheet management, might still hold sway. I’d love to be persuaded that I should buy BT shares. But while the company continues to pursue an ambitious dividend policy at the same time as borrowing all those billions, I will keep away.
