I turned positive on the BT (LSE: BT.A) share price for the first time in several years in the middle of 2020. At the time, I believed the company was working hard to put its past mistakes behind it, and these efforts, coupled with the group’s discounted valuation, could act as a dual tailwind for the stock.
As it turns out, I was right on the money. Since the middle of 2020, the stock has returned around 100%. This figure does not include dividend income, although the company did not pay any income to shareholders for its 2021 financial year.
Outperformance
The way I see it, the BT share price has outperformed for two reasons. Firstly, the company’s operating performance has not been as bad as expected.
In fact, trading has been so strong the business announced towards the end of last year that it would no longer be seeking a joint venture partner to help fund the rollout of its fibre broadband network across the country.
What’s more, the company has also reintroduced its dividend. The City groaned when management announced the group would be eliminating the payout in 2020. Some analysts speculated it could be years before the organisation reinstated the distribution.
However, the corporation now plans to pay a dividend of 7.7p in its current financial year, giving a dividend yield of 4.1% on the current share price.
The second reason why the company has outperformed, in my opinion, is down to its valuation. As I expected in 2020, it was only a matter of time before bargain-hunters started sniffing around. At its low point, the stock traded at a forward price-to-earnings (P/E) multiple of about 5. Today, the figure is approximately 9.7.
The outlook for the BT share price
The question is, can this trend continue? I think it would be silly for me to suggest the BT share price can continue to rise indefinitely. The company faces multiple challenges.
Higher interest rates will increase the cost of financing for the enterprise. With a total debt mountain of £23bn, even a small interest rate increase could cost the corporation tens of millions of pounds in additional fees every year.
At the same time, the group is facing increasing pressure from competitors.
These are some of the biggest challenges the enterprise will face going forward. Still, I think BT’s outlook has improved dramatically over the past couple of years. Earnings growth is expected to return in fiscal 2023. If the company hits this target, it will be the first time earnings to have expanded since 2016.
This growth potential, coupled with the return of the business’s dividend, suggests to me the outlook for the company is improving. As such, I would be happy to buy the stock for my portfolio today.
I think the BT share price can go higher, and I want to capitalise on this growth.
