Despite having a tough time during the summer months, BT (LSE: BT.A) shares have bounced back to rise a healthy 15% year-to-date. Half of this growth has come in the last 30 days, during which time the shares have climbed over 7%.
Given this renewed momentum, coupled with the company’s low valuation, I think the stock could continue to experience upward momentum for some time to come.
Perspectives on value
BT shares have an appealingly low valuation. The stock’s current price-to-earnings (P/E) ratio is just 7. For context, most investors consider ‘good value’ stocks to trade below 10. The FTSE 100 average P/E ratio usually hovers around the 14 mark. This discounted valuation seems attractive on the surface.
However, value compared to the wider market is only part of the story. Other European telecoms heavyweights like Vodafone and Deutsche Telekom, trade on P/E ratios of 2.1 and 5.7, respectively, which slightly dampens my optimism.
That being said, much of the allure of BT shares lies in their substantial 6% dividend yield, which offers a potential avenue for healthy passive income generation. Reinvesting these earnings back into the stock (or my wider portfolio) could amplify returns through compounding returns.
Complementing BT’s valuation is its industry-leading brand recognition within the UK’s telecommunications sphere. Although intangible, the company’s robust reputation and proven customer base attract me to the stock. In fact, BT holds the largest market share of any broadband provider in the UK, totalling 34% of all fixed broadband subscribers.
BT has also taken strides in expanding its 5G network coverage across the UK— which now encompasses over a thousand towns and cities. The company also recently announced its customers would gain access to EE broadband deals. EE broadband’s consistent top-tier rankings by independent third parties bode well for customer retention and attraction, further solidifying BT’s market positioning.
Not all plain sailing
One glaring concern I have for BT centres on its towering debt load. At just under £20bn according to its latest financials, this figure is pretty alarming given the company’s market capitalisation of £13bn
Elevated interest rates pose a significant threat, potentially translating into escalated debt repayments, risking hundreds of millions in financial exposure. Such a scenario could profoundly impact BT’s profitability, restricting its capacity to execute future growth initiatives.
That being said, it seems as if the worst of the tough macro climate might be behind us. Data released in the last week by numerous analysts has forecast UK interest rates to start falling as early as next year and be down to 4.5% by 2025. This is far from guaranteed, but it does alleviate some of my concerns over BT’s debt-dominated balance sheet.
The verdict
I believe BT shares offer me exposure to a UK blue-chip brand with a commanding market share. I also get all of this at a low valuation. The stock has shown some signs of picking up in the last month and I think this is investors realising it has been beaten down for too long. Therefore, I’d be buying shares today if I had the spare cash.
