BT (LSE: BT.A) shares are tempting but terrifying. The telecoms giant is a household name blue-chip trading at a cheap valuation while offering a super-high yield. In other words, exactly the type of stock I’d like to buy. So why am I so scared?
The group has bags of comeback potential. However, a quick look at its steadily falling revenues, declining dividend payouts and huge pension liabilities usually has me running for the hills. Yet last week finally brought some much-needed good news.
First-half revenues rose 3% to £10.4bn, due to “increased fibre-enabled product sales, inflation-linked pricing and improved lower-margin trading”, which partially offset legacy product declines.
Ready to rally more?
Earnings rose 6% to £4.1bn as strong cost control offset both inflation and one-off items. A 29% increase in reported profit before tax was good to see.
Outgoing CEO Philip Jansen was able to claims that “BT Group is delivering and on target”, ahead of handing over the baton to former Telia boss Allison Kirkby. He also said BT has a “bright future”. That’s something markets have struggled to see, but this time investors also took a positive view.
BT shares jumped 11.9% over the last week and are up 6.6% over 12 months. They’ve still more than halved over five years though. Yet today’s share price of 123.65p leaves them trading at just 6.4 times earnings. Still cheap, still tempting.
Today, the stock yields 6.2% and despite concerns that this will not be sustainable, the payout is covered 2.5 times by earnings. BT stock is forecast to yield 6.24% in 2024 and 6.29% in 2025… assuming the income comes through. There’s a chance it could. The board expects normalised free cash flow to be towards the top end of BT’s £1bn-£1.2bn guidance range for 2024.
Still good for income
The Pensions and Lifetime Savings Association reckons a single person needs £23,300 a year to achieve the ‘minimum’ retirement living standard. That includes the new State Pension, which currently pays a maximum £10,600.
Let’s say I decided to generate the remaining £12,700 from BT alone. Given today’s dividend per share of 7.7p, I’d need to buy 164,935 shares. That would cost me £203,942. Which is an awful lot of money to put into one stock and especially a risky one like BT.
After last week’s surprisingly positive market update, I think there’s a place for BT Group in a balanced portfolio. But I need to keep my head here as there’s still an awful lot that can go wrong. Kirkby faces a heap of challenges. Net debt is still mighty high at £19.7bn, up from £18.9bn a year ago. Not good in an era what interest rates are expected to stay higher for longer
The groundwork of the recovery has been laid though, with BT on track to meet its £3bn savings target by full-year 2025. Yet I can find bigger yields on the FTSE 100 today with less risk attached.
I wouldn’t put £200k into BT shares but I’d consider investing, say, £5k when I have the cash. When building a retirement portfolio, balance is all.
