Should I buy BT shares right now?

With the dividend back on tap, are BT shares bargain buys at current levels? Roland Head investigates.

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The BT Tower looming above London's skyline

Image: BT Group

BT Group (LSE: BT-A) shares edged higher this morning, after the company announced increased profits and a deal to offload its television business.

With the telecom group’s turnaround seemingly underway, I’ve been taking a fresh look to see if I should be buying BT shares for my Stocks and Shares ISA.

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Good news for shareholders

BT’s pre-tax profit rose by 9% to £2.0bn last year. And after skipping a year in 2020/21, the company’s dividend is back.

Today’s final dividend of 5.4p gives a payout of 7.7p per share for the year ending 31 March. That’s equivalent to a yield of 4.3%, which is well above the FTSE 100 average of 3.5%.

BT has also agreed a TV deal with Warner Brothers Discovery that looks like a long-term win to me. The BT Sport service will be combined with Eurosport UK in a joint venture that will be run by Warner Brothers. BT will have a 50% stake in the joint venture and will receive an upfront payment of £93m, with performance-related payments of up to £540m in the future.

It’s not really big money for BT, but I think this is good news. BT Sport was never a big part of BT’s business, and always looked expensive to me. I’m pleased to see this distraction removed so that the company can focus on its core telecoms services.

This is what worries me

It’s not all good news. One of BT’s problems in recent years has been that its sales are falling. This trend continued last year, with revenue down 2% to £20.9bn. That’s 13% lower than in 2017, when BT reported revenue of £24.1bn.

When a company’s sales are falling, it becomes harder to generate profit growth. Cost cutting can only go so far – at some point, sales need to rise.

Another concern is that BT’s big-spending ways mean net debt remains high, at £18bn. That’s nearly 2.5x the group’s adjusted cash profits – higher than I like to see.

Although free cash flow of £1.4bn will cover the dividend twice, BT isn’t yet generating enough cash to repay much debt.

BT shares: what I’m doing now

I think BT’s future looks safe enough. As the UK’s largest mobile and broadband network operator it has economies of scale.

The company’s reputation is also said to be improving – BT reported “low Ofcom complaints” and said the number of customers cancelling services was “near record lows”.

However, I’m struggling to get too excited about owning BT shares. Although I think the share price could rise a little further from current levels, I think that potential gains are limited.

Based on today’s results, BT is struggling to put up its prices in a very competitive market. At the same time, it’s having to spend more to deliver upgraded fibre and 5G services.

Broker forecasts before today suggested that growth is going to remain limited over the next couple of years. Although the stock’s price/earnings ratio of eight may seem cheap, I think it’s justified by the flat outlook for the business and its heavy debt burden.

For these reasons, I won’t be buying BT shares for my portfolio at the moment.

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Roland Head 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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