Investors seem to have had a love/hate relationship with BT Group (LSE: BT-A) over the years. And just as things were looking steady in 2022, the BT share price fell off a cliff in July.
Has anything gone wrong? And is this now a great time to buy some shares cheap? Well, the latest share price dip comes on the back of a third-quarter update released at the end of July.
The key disappointment, it seems, was a 10% drop in pre-tax profit. Couple that with a fall in normalised free cash flow, resulting in a £0.2bn outflow, and investors will surely fear pressure on the dividend.
More concerning to me is an increase in net debt. At £18.9bn, this was £0.9bn higher at 30 June than it had been three months earlier. BT put the increase down to pensions contributions and lower cash flows. And yes, those will be variable, and we can’t expect a straight-line decrease in debt.
Dividend plans
But aren’t they factors that a company should consider when setting ambitious dividend plans? For the year ended 31 March, BT reinstated its full-year dividend, paying 7.7p per share. At the time, that represented a yield of 4.2%. And just three months later, debt is spiralling upwards again.
It seems to me that BT is blinkered by a singular drive to pay as much as it can in dividends. And it doesn’t appear to care too much about the effects that has on debt. Or on how it might affect the value of the company in the long term.
Now I love a good dividend. In fact, dividends are the focus of my investing strategy. But I only want dividends that a company can afford while maintaining a healthy cash position and not damaging the value of my shares.
Sector madness?
I don’t know if it’s a telecoms thing in general, after seeing Vodafone doggedly sticking for years to big dividends that it couldn’t afford. And that was while watching its share price crumble.
To be fair, BT has been making good progress on its other major liability, its pension fund deficit. In IAS 19 accounting terms, BT slashed the deficit from £4bn to £1.1bn in the year just ended. In the next triennial assessment due in 2023, the improvement in actuarial terms is expected to be less impressive. But we should still see good progress.
What does all this mean for my take on the BT share price? For the past few months, I’d been thinking it really might have reached its lower limits. And I was beginning to believe I was seeing an improvement in sentiment.
Business progress
I do actually like the company’s broadband progress, together with its impressive development of content offerings. But it looks like any sentiment uplift might have faded again now.
Have we seen a fresh bottom, and is the BT share price likely to head upwards from here? Despite my bearishness, I really think it might do. And I wouldn’t bet against BT ending 2022 ahead of where it is now.
I personally won’t invest in a company with BT’s attitude to debt and dividends though. I just see that approach as destroying long-term shareholder value.
