BT Group’s (LSE:BT.A) share price is sinking again as concerns over the macroeconomic and geopolitical climates rise. It’s a descent that has driven the company’s already-large dividend yields through the roof, based on current City forecasts.
At 111p per share, the FTSE 100 firm now carries a 6.9% dividend yield for this financial year (to March 2024). This is far ahead of the 3.8% forward average for London’s leading share index.
City analysts expect the dividend to only remain on hold in fiscal 2025. The good news however, is that investors can still enjoy that massive dividend yield. Besides, the yields on many other UK shares are falling as analysts predict swingeing payout cuts in the short term.
How realistic are these current dividend forecasts though? And should I buy BT shares for passive income?
Frozen dividends
It’s fair to say that the firm has had a bumpy dividend history more recently. It reduced shareholder rewards during the pandemic, and axed them completely in fiscal 2021 as it sought to rebuild the balance sheet and continue with its fibre rollout programme.
Dividends returned the following year, at 7.7p per share, but were frozen in the fiscal year ended last March. And City brokers expect dividends to be maintained at this level for the foreseeable future.
These predicted dividends are well covered by anticipated earnings too, which provides investors with some peace of mind. Coverage for the next two years sits at 2.4 times, comfortably above the widely regarded safety benchmark of 2 times.
That said, as a potential investor, I’m concerned by the state of BT’s balance sheet. Net debt continues to rise, and increased by £850m during the 12 months to March, to £18.9bn.
Big dangers
The problem for BT is that the high cost of its broadband drive, combined with the need for ongoing contributions to its pension scheme, undermine its ability to get control of these debts. All the time, the cost of servicing these liabilities is in danger of steadily rising as interest rates increase.
In this climate, it’s hard to see how the business will begin raising dividends again. But this isn’t the chief concern for me today. I actually think deep cuts could be coming soon as the firm seeks to finance its broadband rollout target of 25m premises. It hit just 44% of this total as of June.
These are not the only dangers to investors either. BT’s dividends could disappoint and its share price continue plummeting as the UK economy sinks and consumers and businesses tighten the pursestrings. Rising competition presents a significant long-term threat to its profits as well.
The verdict
BT clearly plays a vital role in the digital revolution. And it’s seeking to boost its position through that broadband rollout programme. As such, the business could enjoy strong and sustained earnings growth as technology steadily takes over our everyday lives.
However, right now, I’m not convinced by its position as a robust dividend stock. So I’d rather buy other shares for a passive income instead.
