Many investors love a bargain, which is why they seek out value stocks. Essentially this is like rummaging through discounted merchandise in search of great deals. It’s just done on the stock market instead of in a shop or outside a car boot in a muddy field.
It’s often worth the effort. That’s because a good value stock can provide both protection against losing money and the potential to cash in if investors come to recognise the stock’s true (higher) intrinsic worth.
Fortunately for value investors, there are many such UK stocks to run the rule over. One is BT Group (LSE:BT.A), the telecoms giant that has looked cheap since, well, almost forever now. In fact, it is currently one of the cheapest in the FTSE 100.
But I personally wouldn’t buy it, even with free money. Here’s why.
A two-decade share price collapse
During the 1990s, investors became giddy about the possibility of the internet changing the world forever. If any company was to benefit massively from this, surely it was BT. The telecoms firm would literally build out and own the infrastructure that enabled this world-changing technology.
This expectation was reflected in the BT share price, which peaked in December 1999. However, since the turn of the millennium, the stock has shed a staggering 89% of its market value.
Even over shorter periods, the share price performance has been poor. It has fallen around 49% in five years and 10% over the last 12 months.
Cheap for a reason?
The outcome of this decline is an incredibly low price-to-earnings (P/E) ratio of around six. Couple this with stable revenue and earnings, and a prospective high-yield dividend, and BT stock appears to be a potentially great value play.
However, the group has net debt of £19.9bn. This is actually higher than the company’s market cap of £11.4bn. Just writing that makes me want to avoid the shares, to be honest.
But there is also the ongoing issue of pension deficits. That is, funding for the defined benefit BT Pension Scheme (BTPS). This was at £4.4bn at the end of June last year, as reported in the most recently available BTPS annual report. Top-up payments here will drag on free cash flow for years.
Meanwhile, relentless investment continues in its 5G rollout across the UK. So I don’t expect debt to be brought down meaningfully any time soon. Not unless it raises money through a sale or spin-off of its Openreach networks business.
That might create some sort of shareholder value, though this has been mooted for years now.
An unappealing stock
On a positive note, the juicy 6.4% dividend yield appears to be well supported, with coverage of 2.4 times expected earnings. Cover of two is generally seen as providing a solid margin of safety.
However, the recent dividend history doesn’t exactly inspire me. The payout is less than half what it was before the pandemic. And analysts have little dividend growth penciled in for the next couple of years. Or revenue growth.
Given all this, I don’t see any catalysts that might get investors enthusiastic about the shares again. I’m certainly not. There are so many exciting companies out there today. Why bother here? That’s how I feel.
