BT: a FTSE 100 share to buy before February?

FTSE 100 giant BT is expected to release its Q3 trading update on 2 February – so should I buy its shares today for potential gains?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

woman sitting in wheelchair at the table and looking at computer monitor while talking on mobile phone and drinking coffee at home

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in British Telecom (LSE:BT.A) have started the year on the front foot. The stock is up by more than 10% and could see further gains in early February when it reports its Q3 numbers. Even so, it doesn’t necessarily make it a buy for my portfolio.

Dialling up the positivity

Having held up strongly against a market downturn in the first half of 2022, BT shares took a dive in the second half as higher costs hurt its bottom line. Nonetheless, a reversal could be on the cards as a number of investment banks turn bullish on the stock.

The likes of Citi, Goldman Sachs, and Jefferies recently upgraded their ratings to ‘buy’ with an average price target of £1.67. This presents a 30% upside from its current share price, and there are a couple of reasons behind this renewed optimism.

The first would be a rise in its wholesale prices for internet service providers (ISPs) to use its fibre optic cables. The second would be the above-inflation price hike (18.3%) for its broadband customers. These moves should help the company’s margins, and see its net income start to recover after three consecutive years of falls.

BT Net Income.
Data source: BT

Lining up the numbers

For its latest quarter though, the firm is expecting to report a decline in revenue. Sky-high inflation continues to clamp down on consumer spending. On the flip side however, analysts are forecasting a 3% increase in the group’s EBITDA as cost controls start to take effect.

MetricsQ3 2023 (Consensus)Q3 2022Projected growth
Group revenue£5.24bn£5.37bn-2.5%
EBITDA£2.02bn£1.96bn3.0%
Data source: BT

Even though BT’s top line is forecast to decrease, an improvement to its bottom line is certainly a plus. Provided the telecoms giant can surpass estimates, I can see further boosts to its share price. That being said, there are caveats to take into consideration. A change to its profit outlook and dividend guidance could change the share price’s trajectory as well.

MetricsFY23 (Consensus)FY22Projected growth
Group revenue£20.53bn£20.85bn-1.5%
EBITDA£7.91bn£7.58bn4.4%
Basic earnings per share (EPS)17.6p12.9p36.4%
Dividend per share7.74p7.70p0.5%
Data source: BT

A buy signal?

Do I think BT shares are worth a buy before its Q3 trading update then? Well, there are certainly a number of tailwinds that make a positive case. Pair this with its cheap valuation multiples and it’s certainly enticing.

MetricsValuation multiplesIndustry average
Price-to-earnings (P/E) ratio7.517.2
Price-to-sales (P/S) ratio0.61.2
Price-to-book (P/B) ratio0.91.7
Price-to-earnings growth (PEG) ratio0.84.1
Data source: YCharts, Simply Wall St, NYU Stern

Moreover, its strong history of high and growing dividends should pique the interest of investors searching for passive income. After all, it’s got an excellent dividend cover of 2.6 times.

BT Dividend History.
Data source: BT

Nevertheless, these catalysts shouldn’t detract from the various issues the conglomerate faces, and its terrible balance sheet is a big one. Price increases could serve its bottom line well. However, regulators are looking into them and could veto those increases to protect ISPs and customers. It’s worth noting that its new wholesale prices are yet to be approved by Ofgem.

BT Financials.
Data source: BT

Although most of its debt isn’t due soon, repayments are undoubtedly going to hinder future earnings and dividend expansion. This is evident in the latest analyst estimates, which predict a drop in EPS and dividends through to FY25.

Consensus metricsFY23FY24FY25
Group revenue£20.53bn£20.82bn£21.01bn
EBITDA£7.91bn£8.05bn£8.19bn
Basic earnings per share (EPS)17.6p16.7p17.3p
Dividend per share7.74p7.79p7.63p
Data source: BT

So, given that I invest for the long term, I don’t see BT shares as a good investment despite its short-term tailwinds. Thus, I won’t be buying the stock today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. John Choong has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Dividend Shares

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

Are these 2 defensive FTSE 100 stocks shrewd buys after recent updates?

This Fool takes a closer look at these FTSE 100 stocks. She admires their defensive traits -- but does that…

Read more »

Investing Articles

How many Aviva shares do I need to collect a £100 monthly income?

Aviva shares are well suited for passive income purposes. Our writer works out how many would be needed for a…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

£2k to invest? I’d buy 883 shares of this overlooked dividend giant for a second income

This FTSE 100 dividend stock has had a mixed time since floating in 2019 but it looks like a brilliant…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£7,000 of money to spare? Here’s how I’d aim to turn that into £1,000 in annual extra income

Christopher Ruane explains how he would aim to generate a four figure income to cushion his future, all with dividend…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is this stellar dividend growth stock the only no-brainer buy on the entire FTSE 100?

Picking shares requires careful thought and analysis, but this FTSE 100 growth stock appears to be pressing all the right…

Read more »

Investing Articles

I bought 422 Glencore shares in July and 232 in September. Here’s what they’re worth now

Glencore shares have had a rough ride leaving Harvey Jones out of pocket. Should he cut his losses or average…

Read more »

Investing Articles

Empty Stocks and Shares ISA? I’d snap up these 3 stocks to start with!

Sumayya Mansoor explains how she would start to build wealth from scratch with an empty Stocks and Shares ISA and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

7.7% yield and going cheap! Why is this unknown FTSE 250 stock flying?

It's no household name, but there's one FTSE 250 stock with a high dividend yield and booming profits that looks…

Read more »