A decade ago, the BT (LSE:BT.A) share price stood at 379p. Today shares in the communications giant are changing hands for just 122p. It’s been a disappointing fall from grace.
So, why is that? And can I trust BT to make me money going forwards?
Disappointing decade
The decline of BT’s share price over the last decade has been shaped by several factors. All in all, the stock has fallen 70%. Here are some of the reasons why.
The telecommunications landscape has become more competitive, with newcomers like Sky and Virgin Media introducing alternatives to BT’s conventional services.
This rivalry has pressurised BT’s profit margins, casting shadows on its operational model and costings.
Moreover, BT has increased capital expenditure, particularly in the rollout of fibre broadband, impacting near-term financial performance and introducing a new layer of jeopardy as debt has grown.
BT’s pension deficit has proven another burden. The company has been making payments to the pension scheme in order to reduce the deficit, but this has further eroded shareholder returns.
Additionally, BT has faced criticism for a perceived lack of strategic direction. This has generated uncertainty among investors.
Coupled with slow economic growth, Brexit, and a pandemic, it’s not been a good decade for BT.
Where next?
BT shares currently trade at a 53% discount to the global communications sector using the price-to-earnings (P/E) ratio. That’s an attractive metric to start with, but it does raise questions.
Communications is an exciting sector, with constant developments and innovations driving the industry forward.
And this is why investors are often willing to pay a premium — in the form of a higher P/E ratio — for growing stocks in the sector.
Unfortunately, BT doesn’t appear to be one of those growing stocks. The company is forecast to deliver earnings per share of 15.6p in 2024, 15.3p in 2025, and 15.9p in 2026. That’s not exciting growth.
Combined with a net debt position of £19.7bn, this is why BT trades at just 6.9 times TTM (trailing 12 months) earnings.
This low growth rate also leads to a price-to-earnings-to-growth (PEG) ratio of 2.9.
The PEG ratio is an earnings metric adjusted for growth, with a ratio of one suggesting fair value. Above one infers that a company is overvalued.
Moreover, while the 6.3% dividend yield is strong and coverage mathematically isn’t bad, UBS recently warned that BT is effectively borrowing more than £900m a year to fund it.
BT’s net debt position rose to £19.7bn in September from £18.9bn in March. That’s £800m in six months. While this may hurt investors, BT might be better off cutting the dividend to focus on its financial health.
Despite operating in an exciting and innovative sector, BP’s combination of slow EPS growth, high debt, and a dividend that might not be sustainable, means I don’t have much faith in the shares. I’m not buying anytime soon.
