The FTSE 100 has rocketed higher in 2023. But London’s blue-chip index remains packed with brilliant bargains. And on paper BT Group’s (LSE:BT.A) share price looks like one of the best.
The telecoms titan trades on a forward price-to-earnings (P/E) ratio of 6.2 times. This is well below the FTSE index average of around 13.5 times. It’s also under industry rival Vodafone’s corresponding ratio of 12.5 times.
BT also looks like a hot value stock based on projected dividends. Its dividend yield for this fiscal year sits at 5.9%, comfortably ahead of the 3.6% FTSE 100 average.
That said, it’s important to remember that some UK shares trade cheaply because of the dangers they pose to investors. So are BT shares a bona fide bargain or an investment trap?
Revenues drop
The company’s freshest financial update this week provides a good starting point for share pickers. Unfortunately this showed another quarter of revenues weakness during the three months to December.
BT said turnover dropped a further 3% in the third quarter, to £5.2bn. Sales across its Consumer, Enterprise and Global units all reversed. Only its Openreach infrastructure division grew revenues in the quarter.
These poor results reflect the cost-of-living crisis and its impact on household budgets. It also illustrates the growing stress on business spending as the UK economy cools.
The worry for me as an investor is that these tough conditions are set to persist. Economists have tipped a recession lasting well into 2024. And in an extremely competitive marketplace BT may have to keep prices at rock-bottom to stop customers leaving en masse.
This is an especially large problem for profit margins in this period of high inflation.
Debt pain
Weak revenues growth couldn’t come at a worse time for BT. This is owing to its high debt levels that continue to swell.
The business simply isn’t generating strong enough profits to pay down its debt. Indeed, pre-tax profits slumped 15% between April and December, to £1.3bn. And as a consequence net debt jumped by an extra £1.5bn year on year to £19.2bn.
These high financial liabilities are costing the company a fortune in interest payments. Debt servicing expenses will keep increasing too as the Bank of England raises interest rates.
Net debt looks on course to keep growing rapidly. Building its ultra-fast fibre network and 5G capabilities is an expensive business and total capital expenditure hit £3.9bn in the nine months to December.
The verdict
Telecoms businesses will have an increasingly critical role to play as the digital revolution continues. And by investing heavily in infrastructure BT is attempting to exploit this growth trend to its fullest. Its Openreach division plans to have 25m premises plugged into its fast-fibre broadband network by the end of 2026.
But in the meantime the business has to battle high debts and toughening trading conditions. And these make BT shares too risky in my opinion. I’d rather buy other cheap FTSE 100 shares for my portfolio.
