For years, I think BT Group (LSE:BT-A) had been destroying long-term value for its shareholders. But I think that might be about to change. The dotcom boom and bust was an anomaly, but today the BT share price is still lower than it was in the mid-90s.
Over the years, BT has been paying dividends, so that’s offered some partial compensation for the poor share price performance. But I also think that’s been part of the problem. BT’s concentration on short-term rewards led it to take its eye off the long-term ball, in my view.
Dividend focus
BT’s focus on paying the best dividend yields it could manage came at the expense of spiralling debt. Together with the company’s huge pension fund deficit, that was a huge burden to bear.
Not everyone shares my aversion to investing in companies with large debt though. And in fact, debt funding can be a profitable strategy. But looking at the BT share price over the past decade does suggest that BT shareholders have been steadily going off the idea.
So what’s changed? At full-year results time for 2021, BT didn’t actually say a lot about its debt. But while the net debt figure, at £18bn, was huge, it was only slightly worse than a year previously. And that was over a relatively tough year, when revenue dipped slightly.
Deficit down
Yet the pension deficit is coming down. At least in IAS 19 accounting terms, BT has slashed it from £4bn to £1.1bn in the year to March 2022. The next triennial valuation is due in 2023, when the deficit in actuarial terms is expected to be higher than that. But it’s good progress.
The BT dividend has been rebased too, after being suspended completely in 2021. The company is already making noises about getting it back on a progressive track, and that does concern me. But I hope some of the lessons from the past have been learned. And that the desire to shove as much short-term cash into shareholders’ pockets while under a big debt burden is more tempered this time round.
Shareholders seem to be happier with BT’s expansion into content provision these days too. The company has bought up big sports rights in the past, but took a lot of criticism over the prices bid for them. But this time round, the potential cost-to-benefit comparison appears to be seen more favourably.
BT share price valuation
These different aspects of the company do make valuation tricky, and that creates risk. There’s also serious risk that those, like me, who still steer away from highly indebted companies will help keep BT down in the dumps for some time to come.
But the core reason I’m positive about the BT share price is that I can’t help feeling the market has finally found a price level that it’s comfortable with. There surely has to be a valuation that makes even a company with huge debts an attractive proposition, hasn’t there? I think we might have found it. And I see sentiment improving.
