BT shares: a FTSE 100 name to avoid

BT shares are up despite its underwhelming Q3 update. So, here’s why I’m not buying the stock despite its lucrative dividend yield.

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BT (LSE:BT.A) shares are up slightly today at the time of writing despite a set of disappointing Q3 results. Investors may be rushing to buy the stock for its 6.3% dividend yield, but I’ll be avoiding the FTSE 100 stalwart instead. Here’s why.

Negative data

My first impressions of BT’s latest update aren’t good. Although all of its core segments, bar Consumer, matched analysts’ estimates, the overall top line still missed the mark. With the exception of Openreach, all of its core segments also witnessed revenue declines as the cost-of-living crisis continued to bear down on consumer spending.

MetricsQ3 2023Q3 2022Growth
Consumer revenue£2.44bn£2.59bn-6%
Enterprise revenue£1.25bn£1.30bn-3%
Global revenue£0.86bn£0.87bn-2%
Openreach revenue£1.42bn£1.36bn4%
Group revenue£5.21bn£5.37bn-3%
Data source: BT

Additionally, while EBITDA saw tiny growth, it missed analysts’ estimates too. Free cash flow was also a disappointment as year-to-date figures are lagging far behind the full-year guidance BT originally shared. But what’s most concerning is the company’s dismal pre-tax profit, which would have affected the firm’s bottom line had it not been for tax benefits.

MetricsYTD 2023YTD 2022Growth
Free cash flow£0.11bn£0.88bn-88%
Profit before tax (PBT)£1.31bn£1.54bn-15%
Profit after tax£3.88bn£3.75bn3%
Data source: BT

Expanding its reach

Having said that, there were a couple of silver linings from the report that are worth mentioning. The first would be the continued expansion of Openreach. To complement this, the group saw record quarterly growth for its Fibre to the Premises (FTTP) base as well. This is good news considering the increasingly competitive landscape of the optic fibre market, and may be why BT shares are up.

To boost investor sentiment, CEO Philip Jansen reiterated the conglomerate’s outlook for the year. This took me by surprise as some of the year-to-date (YTD) figures are currently miles away from its guidance. Nevertheless, Jansen mentioned that free cash flow is heavily weighted towards Q4, which should boost EBITDA and receivable collections.

MetricsFY23 OutlookYTD FY23
Revenue“Revenue growth”-1%
Capital expenditure£5.0bn£3.88bn
Free cash flow£1.3bn to £1.5bn£0.11bn
Cost savings to FY25£2.5bn to £3.0bnN/A
Data source: BT

Poor signals

Will I invest in BT shares on the back of this reaffirmation of its guidance? Probably not. The telco giant still has plenty of headwinds to contend with. An impending recession paired with a slew of regulatory battles surrounding its price increases can very easily tip the scales for the worse. What’s more, its balance sheet is in tatters, which hasn’t been helped by a further increase in net debt this quarter.

BT Financials.
Data source: Simply Wall St

That being said, BT shares do scream a bargain when assessing its valuation multiples. But I think this is a value trap given the fragile outlook for its top and bottom lines.

MetricsValuation multiplesIndustry average
Price-to-book (P/B) ratio0.81.8
Price-to-sales (P/S) ratio0.61.2
Price-to-earnings (P/E) ratio7.317.3
Data source: Simply Wall St

The likes of Goldman Sachs, Citi, and even Jefferies may have ‘buy’ ratings on the stock. However, I’m more inclined to side with Deutsche with its price target of £1.40 given my initial assessment of BT’s latest Q3 update. Thus, I won’t be starting a position any time soon.

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.

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