Wrong number? Not lately! Telecom company BT (LSE: BT.A) has seen its share price increase by a fifth over the past year.
Despite that, it continues to trade on a cheap-looking valuation. The price-to-earnings ratio is just seven.
So, could it make sense for me to buy the shares now for my portfolio and hope for further share price increases in 2024 and beyond?
Long-term potential
BT has certainly had plenty of challenges over the years.
I expect some of those will continue, from declining demand for its traditional service offering to the need to keep funding its legacy pension pot.
Set against that, though, I see some strengths.
Consider the company’s subsidiary, Openreach. It essentially provides much of the backbone for the country’s Internet infrastructure – and is wholly owned by BT.
At the interim stage last month, the company announced that revenues were slightly down from the same period last year.
Post-tax profit also slid 5%, but still came in at £844m. BT has a large customer base and limited competition in some of its markets. That means that it could continue to throw off sizeable profits.
Although it held the interim dividend flat, the yield of 5.7% is still well above the FTSE 100 average and looks attractive to me.
Some ongoing concerns
But while I like the dividend and think the BT share price looks cheap relative to earnings, I still have no plans to buy the shares.
One concern I have is the company’s net debt of nearly £20bn, significantly more than its £13bn market capitalisation. Servicing that will likely eat up considerable funds over the years.
Another risk I see is those pension liabilities I mentioned above. Indeed, they were one reason the net debt grew in the first half.
With its commitments to thousands of pensioners, BT basically has to keep paying an uncertain amount. Such pension liabilities can be a like a piece of string, as they can go on for a long time and also be difficult to predict in terms of costs.
I also feel the business is decent, but not brilliant. Yes, it has a well-known brand and large customer base. But, as the interim results demonstrated, it struggles to translate that into flat, let alone growing, revenues. BT often feel like a business without a compelling strategy to me.
No plans to buy
That does not mean we might not see more increases in the BT share price next year and beyond.
I think the strong performance over the past year has reflected investors deciding the shares had been beaten down too much for a consistently profitable business with attractive assets.
Given its current valuation, I think that could continue.
But the debt concerns me, as well as the fact that I find BT a fine but not amazing business. For that reason, I have no plans to add the shares to my portfolio.
