I’ve been watching the BT Group (LSE: BT.A) share price slide for years now.
It’s down about 70% in the past decade, hand in hand with Vodafone. And the two companies share some similarities, apart from just being in telecoms.
Both have track records of paying big dividends, and both carry huge amounts of debt.
Share price
Vodafone might be one for another day. But here I’m looking at BT, whose dividend policy has had me puzzled for years.
Does it make sense to pay out a lot of cash when the debt is so high? I’ve seen that approach as likely to damage shareholder value in the long term.
And it looked like the past 10 years of share price falls might be proving me right. But maybe not.
Risk averse
Where I’d thought investors were giving up BT shares because they don’t like the balance sheet, maybe it’s just an adjustment to today’s dividends.
When times are good, investors often don’t seem to care much about debt. As long BT keeps paying, why would they?
With a brief Covid halt, BT has been paying. Right now, though, after a few years of falling earnings, the dividends are half what they were before the pandemic.
The latest dividend yield, at a forecast 6.6%, is almost back where it was in 2019. So on that score, the stock valuation is just the same as it was.
Dividends covered
Going by forecasts, dividends should keep rising, and they should be comfortably covered by earnings.
We’re looking at cover of around two times, and that’s up with some of the best in the FTSE 100.
So it doesn’t look like the debt is harming BT’s ability to pay dividends, or generate the earnings to cover them. And it didn’t seem to create any great threat to the company in the pandemic days.
So why worry? Funding a company through debt can be effective. It might make me twitch a bit, and I don’t buy high-debt stocks, but it can work out fine.
Five years
What might the next five years hold? I suspect a lot could depend on what happens to the dividend next.
BT didn’t said a lot about that at interim results time. And I’m going to be cautious that new CEO Allison Kirkby might have different views about the relative merits of debt and dividends.
We should have a Q3 update on 1 February, with FY results coming in May. And things could stay uncertain until then, at least.
With the change of leadership, forecasts should be treated with extra care too, I think.
Cautious optimism
But with all that said, I expect share price growth from BT in the next five years. Want a finger-in-the air? I wouldn’t be too surprised to see it double, if we get an uprating too. But that’s just a guess.
The risk brought by that high debt will still keep me away, though.
