Back in the spring, BT (LSE: BT.A) shares looked promising and the price had been rising all year.
It looked like the market was responding to the ongoing turnaround efforts within the telecoms business. But shareholders have suffered a set-back since then. And near 122p, the stock is down around 23% since April.
The rising cost of borrowing
Part of the problem could be the ongoing rises in interest rates as the Bank of England continues to battle with inflation that remains stubbornly high.
One of the prominent features of the BT business is its big pile of debt on the balance sheet. And high borrowings can be uncomfortable when interest rates rise because it can become more expensive to service the interest payable on debt.
Higher interest rates may act as a drag on the future financial performance of the BT business. And weakness in the share price now might be pricing that possibility into the company’s valuation.
To put things in perspective, the stock has fallen by almost 37% over the past year.
Meanwhile, recent media stories speculate that Deutsche Telekom might be preparing to lead a takeover offer for BT.
The German company already owns around 12% of BT’s shares. Although it’s not the largest shareholder.
And uncertainty around the business intensified on 10 July when BT announced its chief executive, Philip Jansen, intends to step down “over the next 12 months”.
The search for a new chief is now on. But the directors said the company is well prepared for the succession process. And it’s already considering candidates and hopes to update the market on progress over the course of the summer.
The strategy is on track
Chairman Adam Crozier said the directors support the long-term strategy developed by Jansen during his time as chief. And although the business is in the early years of its transformation, the company looks set to deliver.
However, the fibre rollout programme is expensive. And it appears to be pushing the company’s borrowings ever higher. For example, May’s full-year results report shows an increase in net debt of £850m to almost £18.9bn.
However, Jansen said in May that BT grew its pro forma revenue and earnings before interest, tax, depreciation and amortisation (EBITDA) in the trading year to 31 March. And that was for the first time in six years, despite the difficult macro-economic backdrop. He said the Openreach division has been “competing strongly” and customers “love” full fibre.
Looking ahead, Jansen thinks BT can help to digitise the way people work with its programme of fibre rollout. And he predicts the simplification of BT’s structure. He thinks the company will rely on a much smaller workforce and a “significantly” reduced cost base. And by the end of the 2020s BT will be a leaner business with a brighter future.
That outlook statement suggests lower costs ahead may lead to improved profits. And any easing of interest rates in the coming years may add to an improved financial performance in the business.
Positive long-term outcomes are not certain for shareholders now. But the valuation has declined recently and the anticipated dividend yield is above 6%. That looks attractive to me.
