Does the surging BT share price make the stock a buy?

The surging BT share price makes the company one of the best performers in the FTSE 100. Dan Appleby looks to see if he should still buy the stock.

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It’s been a good start to the year for the BT (LSE: BT.A) share price. Already, the shares are up 16%. And over one year, the stock is up a huge 50%. It means the company is one of the best performers in the FTSE 100 so far this year.

So, what’s going right for BT? But most importantly, should I add the shares to my portfolio?

What’s going right?

One of the points that appeals to me as a potential investor in BT is its expanding next-generation networking. This includes things like full fibre internet directly to homes, and wireless 5G mobile networks. BT is directly involved in these crucial upgrades across the UK. And things have been progressing well of late. As part of the results for the nine months to 31 December, BT said it “had a good [third] quarter with encouraging market share performance“.

Expanding on this further, it was another record-breaking quarter for the full fibre rollout for BT’s Openreach subsidiary. BT also confirmed that its 5G network now covers 40% of the UK’s population. These continuing upgrades will be key for its prospects in the years ahead, in my view. Indeed, Openreach’s revenue and profit grew by 4% and 7%, respectively in the nine months compared to the equivalent period last year.

However, the update wasn’t all good. In fact, total revenue over the nine months actually declined by 3% compared to last year. BT put this down to reduced demand for its enterprise legacy products and challenging market conditions in its global businesses.

In terms of overall profit though, BT was able to control costs very well. This meant that adjusted earnings before interest, tax, depreciation and amortisation rose 2%, despite the revenue decline. To my mind, this shows that the management team has a good handle on the business.

Should I buy at this BT share price?

The results didn’t show spectacular growth, then. But the free cash flow generation remained excellent. Looking ahead into BT’s next fiscal year (the 12 months to 31 March 2023), the free cash flow yield is expected to be almost 8%. This will support a dividend yield of 4% according to current forecasts. Therefore, I can see the appeal of BT shares if I’m looking to generate income in my portfolio.

There might be value to unlock in the company too. Reports had suggested that BT was close to selling its lucrative BT Sport division to DAZN for an estimated $800m. However, just this month, we learnt that BT is now in negotiation with Discovery Communications over a joint venture to combine BT Sport with Eurosport UK. This may lead to DAZN increasing its bid for BT Sport, which could then propell the BT share price higher.

But having said this, I wouldn’t invest in a company based only on this type of situation. It’s a very risky strategy as negotiations could break down. If this happens, then the share price could fall below where I bought the shares.

Nonetheless, I like the prospects for BT going forward, regardless of the outcome for BT Sport. Its expanding networks could lead to impressive growth. Also, the dividend forecast makes the shares attractive for an income investor. So I’d consider buying the stock today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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