Investors have had a love/hate relationship with BT Group (LSE: BT-A) for decades. Right now, it’s gone off the boil, and the BT share price has fallen 39% since mid-July.
That comes despite a late July trading update, in which chief executive Philip Jansen said “BT Group has made a good start to the year; we’re accelerating our network investments and performing well operationally. Despite ongoing challenges in our enterprise businesses, we returned to revenue and EBITDA growth in the quarter.“
The problem is that, though adjusted EBITDA did grow in the quarter, it was only by 2%. And it came from revenue that only rose by 1%. Deeper into the accounts, pre-tax profit fell by 10%.
Cash outflow
BT also reported negative free cash flow, at more than three times the figure from the first quarter last year. From a £43m free cash outflow in Q1 of 2022, BT has gone to free cash outflow of £205m.
BT does seem to be rolling out its Openreach fibre broadband at a decent pace, and it now reaches more than 8 million UK homes and businesses. The company’s new 5G network rollout is going well too, and now covers more than 55% of the population.
This hopefully bodes well for the future. But the boding has been going on for years, and shareholders’ patience looks like it’s being increasingly tested as they wait for the bumper profits.
Sell-off
Couple this with our deteriorating economic outlook, and I can understand the sell-off. I know people who have already downgraded their BT packages to save money, and that’s surely likely to continue.
Oh, and we’re looking at a possible toughening of the competition too. Big rival Vodafone has confirmed it’s in discussions to merge its mobile operations with Three. Vodafone would own 51% of the joint venture company, which could command an estimated 37% of UK mobile revenue.
That would leapfrog it into first place, ahead of BT’s EE network, which currently has 32% of the market.
Low valuation
Still, the BT share price weakness does make valuations look attractive. Forecasts suggest a price-to-earnings (P/E) multiple of only around 6.2 now, which is super low. And it’s propelled the forecast BT dividend above 6%.
But I see some key cautions here. Firstly, I don’t have too much confidence in forecasts in the face of a likely recession. BT did reiterate its confidence in its full-year outlook. But this is after just one quarter, and there’s a long way to go yet.
Dividend vs debt
I have another big issue too. I invest for dividends, so normally I’d be drawn to that potential 6% yield. But I see BT’s dividend policy as misguided.
Net debt stood at a whopping £18.9bn at 30 June, up £0.9bn from 31 March. And the torrent of free cash leaving the company rose, as we saw, to £205m in just a single quarter. Oh, and BT still has a big pension fund deficit, which is a further drain on its cash.
So is it time to buy BT shares? Not for me. And it won’t be until BT makes more effort to address its debt.
