It has been a rewarding year for shareholders in telecoms giant BT (LSE: BT.A). Over the past 12 months, the BT share price has increased 52%.
But given the upwards movement, does it make sense for me to add the company to my portfolio today?
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BT share price drivers
One of the reason for the increase in the BT share price has been investor excitement over the 18% stake held by telecoms investor Patrick Drahi through his firm Altice. Although Drahi has said he does not plan to make a bid for BT at the moment, such a large stake being built by an industry insider is seen by many investors as a vote of confidence in the company.
I also think a lot of value hunters moved in on BT because its shares looked cheap at points last year. Even now, its price-to-earnings ratio is only 10, which is not high. Despite the challenges it faces ranging from high capital expenditure needs for spectrum investment to pricing competition, the business has been making progress. Indeed in its interim results in November, the company pleased shareholders by reinstating its dividend. Like the Altice stake, that was seen as a further reason for optimism in the group.
Mixed business performance
Although there are reasons to be positive about the company’s performance, I continue to see substantial reasons for concern too. At the interim stage, revenue fell 3% compared to the same period of the prior year. Profit after tax halved. So the current price-to-earnings ratio might not be as attractive as it seems, given that so far this year earnings are far below last year’s level.
That is not the direction of travel I expect to see in a healthy business. The only sizeable part of the company in which revenues grew was its Openreach broadband network business. BT’s consumer, enterprise and global divisions all saw revenues slide, albeit in the consumer business the decline was small.
In a mature business like telecoms, it is still possible to eke out substantial profits from declining revenues. But the company’s cost base concerns me. Capital expenditure of £2.6bn in the first half was up 30%. That reflects the costly nature of investment in spectrum the company needs to make to stay relevant in its marketplace. Such expenditure is a drag on profitability.
Are the shares a bargain?
All of that makes me think that, for now, the shares are not necessarily a bargain. Instead the price reflects the ongoing risks the business faces.
Looking ahead, profitability may improve markedly. By the end of the decade, the company expects to generate at least £1.5bn more free cash flow per year solely from lowering capital expenditure and operating costs. That could suggest the shares will increase in value in future. But the end of the decade is years away. Meanwhile, other capital expenditure requirements may crop up as technology evolves. There is also always the risk that weak stock markets mean the company needs to make additional payments into its pension fund, as has happened before.
With so many moving parts, I do not plan to add BT to my portfolio. Although there are some positive business trends I also see substantial areas of concern.