At roughly 120p, BT (LSE:BT.A) shares are down 10.8% over 12 months. This means that if I’d invested £1,000 a year ago, today I’d have £892 plus dividends. Thankfully, given the sizeable dividend yield, I could have recouped around £60.
Why has it fallen?
The BT share price has fallen this year for a number of reasons, including:
- Rising costs: BT is facing higher costs in a number of areas, including energy, labour, and materials. This is putting pressure on the company’s margins.
- Competition: It’s facing increasing competition from other telecommunications companies, as well as from new entrants such as mobile virtual network operators (MVNOs).
- Debt: The business has a high level of debt, which is becoming increasingly expensive to service as interest rates rise. Net debt currently stands at an eye-watering £19.9bn and is higher than the company’s market cap of £12bn.
- Economic uncertainty: The UK economy is facing a number of challenges, including high inflation and rising interest rates. This is leading to concerns about a potential recession, which would likely reduce demand for BT’s services.
- Investor concerns: Investors are also concerned about BT’s slow revenue growth and its lack of a clear strategy for the future. It recently appointed board member Allison Kirkby as chief executive, succeeding Philip Jansen around the end of January 2024.
Is there a bull case?
Analysts are keen to point out that BT trades with a lower price-to-earnings ratio than its peers. With a P/E around 7.5 times, it’s cheaper than the likes of Vodafone and European peers like Deutsche Telekom and Telefonica, plus North American giant Verizon Communications.
However, the P/E ratio fails to take into account the weight of debt on a company’s balance sheet. As such, it’s better to use metrics such as the enterprise-value-to-EBITDA ratio, which makes room for net debt or cash positions. Here, BT trades at 4.9 times EV-to-EBITDA, which is actually, again, cheaper than many of its peers.
Likewise, its margins have traditionally been stronger than its peers. BT’s EBITDA margin, which typically remained stable within the low-to-mid 30% range, has recently bucked this trend by rising into the high 30s.
So, with regards to valuation, BT could represents an attractive option.
Moreover, investors will undoubtedly be drawn in by the 6.8% dividend yield. It’s one of the strongest on the index and was covered 2.53 times by earnings in FY23.
My take
As a relatively risk-averse investor, there are several things that concern me about BT. Firstly, the company does not appear to be moving in the right direction and lacks clear revenue growth over the past decade. This is particularly surprising considering the forecast growth of fibre demand and 5G. Secondly, as noted above, net debt is particularly concerning. With this in mind, I believe there’s limited potential here. We may be trading near fair value.
