I’m looking for new investments following the recent stock market falls. And I’m considering picking up a few BT (LSE: BT.A) shares.
But will the communications company be a good pick? Or am I just attracted to the firm because of its well-known name and its long history?
Declining earnings
With the share price near 190p, there’s no question about the stock being lower than it was. In early 2016 it was above 480p. But there was a long and sustained fall to just below 100p by the end of 2020 followed by some recovery in the price. A year ago it was around 200p — just above today’s level.
It’s reasonable to assume there’s been a bit of trouble in the business over the past few years. And the main driver of the multi-year decline in the stock has been falling earnings. Year after year earnings slipped. And the shareholder dividend has been a casualty along the way as well. In 2017, for example, the dividend was 15.4p per share. But in the current trading year to March 2023, City analysts expect the firm to pay just 7.8p per share.
Unfortunately, BT fails one of my basic requirements when selecting stock investments. I like to see a strong and stable record of trading and financial outcomes. And often that’s expressed in gradual annual rises in revenue, cash flow, earnings and shareholder dividends. But those measures have been declining in many cases. With cash flow at best returning to where it was a few years ago.
Nevertheless, history is not the most essential factor. What’s really important is what will happen next. And BT has some evidence that its business has started to improve. For example, analysts expect modest increases in revenue and the dividend in the current trading year and again in the year after that to March 2024. However, it’s possible for any business to miss its estimates because of operational challenges and other factors.
Investing for the future
In March with the full-year results report, chief executive Philip Jansen delivered an upbeat assessment of BT’s prospects. He said the economic outlook “remains challenging”. But the company is investing for the future and he’s “confident” BT is “on the right track”.
Although it has been trading with lacklustre profit margins and low returns on equity and capital, one bright spot is the dividend yield. The company skipped its dividend altogether in the pandemic year. But regular payments are on the cards again now. And the dividend yield is running at just over 4%. However, analysts expect BT to struggle again with earnings ahead and forecast a mid-single-digit decline for the trading year to March 2024.
It doesn’t display the high-quality indicators I aim for with my investments. But perhaps that’s unsurprising given the tough economic environment right now. And I believe there’s a fair chance the company will manage to maintain its dividend payments in the years ahead. That’s because the business provides a service I’d consider to be essential for many. But there’s a lot of debt on the balance sheet that could become problematic if we see a fierce contraction in economic activity. On balance, though, I’d be tempted to research BT now for my diversified long-term portfolio.
