BT Group (LSE: BT-A) has turned around several years of falling earnings to post a rise in 2022. It’s only a modest one. But does it mark a turning point for BT shares? And could we be in for a sustained upwards run now?
BT might seem like a strange candidate for a potential double, after such a lengthy period of underperformance. But I do think there’s a good chance it could happen. Let me explain why.
There’s one thing that I don’t think will hold the BT share price back, and that’s debt. I rarely buy heavily-indebted companies myself. But as long as it’s not an immediate threat to the company, the big investors don’t seem to mind.
Even at the peak of the dot com bubble (for those old enough to remember it), BT still carried lots of debt and a gaping pension deficit. But the share price went through the roof.
Pleasing results
Full-year results showed sparks of optimism. The dividend is back, at 7.7p per share. On the current share price, that’s a decent 4.3% yield. I don’t think that alone will swing things. But analysts expect further progressive rises.
While profit grew, the downside was another fall in revenue. It wasn’t big. But I think we need to see it reversed if BT shares are to have a chance of doubling. There’s only so far a company can boost its margins by cutting costs and improving efficiency.
Despite the tough economic situation, BT is optimistic on that front. CEO Philip Jansen said, at results time, that “we are today reconfirming our FY23 outlook for revenue growth“.
Valuation, valuation
The bottom line is all about valuation. And BT is certainly not valued as a high-tech growth company. We’re looking at a price-to-earnings ratio of only around nine, based on the current share price and on adjusted 2021/22 earnings. Forecasts for rising earnings would drop that lower in another year.
On an enterprise value basis, which takes into account debt, BT’s valuation would not look so good. But as long as the dividends keep on coming, I really don’t see the market being too bothered by that. Getting dividends going again really was a big priority for BT. And the reaction has so far been reasonably positive:
So back to my original question: can I double my money with BT shares? To make that a realistic possibility over the next five years, I think we’d need to see three things.
Three steps
One is sustained growth in earnings and dividends. I suspect that would need at least another year’s results, plus a favourable onwards outlook.
Next, a resumption of revenue growth seems essential. Should we see the downtrend reverse, I suspect that could lead investors to the third condition.
And that is an upwards revaluation of the stock, which will surely require a change in investor sentiment.
There are clearly big risks that none of these three targets will come off. Or, at least, not all three. But if they do, I think BT shares could be on their way up over the next few years.
