Last week, I invested £3,500 in BT (LSE: BT.A) shares. I completed the transaction on the day that the company announced its results for the first half of the year. Investors weren’t impressed and, by late afternoon, the share price had fallen by nearly 9%. However, I saw this as the perfect opportunity to acquire a stake in a quality company at a knockdown price.
Overreaction
To me, the market’s response to the results was an overreaction. Wiping more than £1bn off the value of the company didn’t seem justified given than both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) had increased year on year.
However, investors didn’t appear to like the warning that the board gave concerning the impact of inflation. CEO Philip Jansen said: “We need to take additional action on our costs to maintain the cash flow needed to support our network investments.” He therefore increased the target for gross annualised cost savings from £2.5bn to £3bn by the end of March 2025.
Some are clearly sceptical as to whether this is achievable. Over 48m shares changed hands during the day — nearly 2.5 times more than the average for the previous five days.
Essential services
However, the services that BT provides are a modern-day necessity. Nearly everything we do is moving online, and our mobile phones are no longer used just to speak to people.
BT has connected 8m homes and offices to its fibre network, and has a target of 25m premises by 2026. The company owns EE that it claims is the UK’s fastest mobile network, and 5G is now deployed in nearly all major towns and cities in the country.
More good news
I’m encouraged by the board’s decision to declare a dividend of 2.31p per share. On the assumption that last year’s final dividend is repeated this year, the shares are presently yielding an impressive 6.5%.
I also like the fact that Altice, which is France’s second biggest telecoms company, now owns 18% of BT. Its last purchase of shares was in December 2021, when the stock was changing hands for nearly 175p. When the share price was 30% higher than it is now, Altice clearly felt that BT represented good value.
As recently as July, BT’s shares were trading close to 200p.
Risks
Of course, I may be wrong.
BT could struggle against greater competition, particularly if Vodafone and Three, which are in discussions about merging their businesses, agree a deal.
There’s also the problem of its borrowings. The company had net debt of £19bn at 30 September, compared to £18.2bn a year earlier. However, I take some comfort from Moody’s, the credit ratings agency, which recently upgraded its outlook for BT from negative to stable.
BT is a capital-intensive business, and will always be under pressure to spend more on its infrastructure. Yet I think it remains a solid company with a good management team, and I’m happy with my purchase.
