7.2% yield and P/E of 5.8! Is this the best bargain on the FTSE 100?

On the surface, stock in underperforming BT looks like one of the best bargains on the FTSE 100. But is that the case? This Fool explores.

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Image source: BT Group plc

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If there’s one combination I love, it’s a low valuation and a meaty yield. I’ve been searching for companies on the FTSE 100 that tick both boxes.

One of them is BT (LSE: BT.A). Shareholders have had to endure years of suffering. An investment in the stalwart telecommunications business five years ago would be worth 50.4% less now. This year alone, the stock has seen 14.5% shaved off its price.

That said, on paper, it looks like one of the biggest bargains out there. I’m intrigued if that’s really the case. Let’s break it down.

A lethal duo

The average price-to-earnings (P/E) ratio on the FTSE 100 is around 11. So with a P/E ratio of 5.8, for a company of its quality, BT shares look like a steal. Additionally, it also boasts a 7.2% dividend yield, covered 2.5 times by earnings.

While the stock has struggled to gain momentum in recent times, there’s arguably a reason for that. The business is undergoing a transition ahead of its switch from landlines to fibre-optic cables in 2025. As part of this, it has invested heavily in Openreach, which has proved to be costly. However, things seem to be heading in the right direction, with over 4.4m premises now connected.

More widely, it plans to let go of 55,000 staff by 2030. By doing this, it hopes to streamline its operations.

Issues remain

But even with that in mind, I’m not sure BT is the bargain it may look like on the surface.

For one, it faces stiff competition. BT is a household name and its size, to an extent, gives it an advantage over its peers. Yet the emergence of Altnet providers is a danger to the business.

These more nimble businesses can offer providers cheaper alternatives. With the cost-of-living crisis, this could lead to more people switching. Last year saw BT raise prices for some contracts by nearly 15%. Moves like that won’t go down well with customers.

Looking at its balance sheet, I’m also concerned about the debt on its books. This sits at over £20bn. Large debt is always an issue. Yet with the UK base rate at 5.25%, this only makes matters worse.

My move

BT shares look cheap. And there’s the potential that as some point we see the stock turn around its fortunes. Investors who are willing to take on the risk today could make some handsome gains.

However, that won’t be me. The business faces a lot of challenges going forward. Heavy debt and rising competition are just a few issues that could keep its share price stagnant. I haven’t highlighted other issues, such as its inability to grow its top line in recent years. Its largest attraction is its dividend. If this gets cut, that could be devastating for its share price.

I’ll be keeping a close eye on BT. If it keeps falling, maybe it’ll become too cheap to ignore and I’ll consider opening a small position. For now, I’ll be searching the FTSE 100 for more suitable additions to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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