Why is this FTSE 100 stock out of favour with investors?

This Fool takes a closer look under the bonnet of this FTSE 100 stock to get to the bottom of why investors have been dumping it.

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FTSE 100 stock BT (LSE: BT.A) is down 15.8% year to date. I’m interested in figuring out why investors are selling the stock.

The business is a British icon. It has served millions of customers in the UK (and around the world) with a host of services for over 50 years. But recently, it has more than struggled.

The stock has lost 53.3% of its value in the last five years. That makes grim reading for any BT shareholder. It’s clearly fallen out of favour with investors. I have one simple question: why?

Why the fall?

By digging into BT’s reports, it’s fairly easy to see why the market has lost hope in recent times.

First, it has failed to grow its top line. Since 2017, its year-on-year revenues have been steadily declining. During that time, they’ve fallen by nearly £4bn. While it has shown glimmers of hope this year as Q4 FY24 revenue jumped 3%, it’s still a massive issue.

There’s also the threat of competition. With brand recognition and size comes a competitive advantage. But in a cost-of-living crisis, customers are arguably just looking for the cheapest prices.

Unfortunately for BT, that doesn’t tend to be a feature of its services. It originally targeted a loss of 400,000 customers from its Openreach broadband network in FY24. However, it now expects the final figure to be higher.

What’s more, there are also concerns surrounding its debt. As of September 2023, it had around £20bn on its balance sheet. That’s nearly double its market cap.

A smart time to invest?

But enough of the negativity. At its slashed price, what’s holding BT back from being a screaming buy for my portfolio? There’s certainly a lot to like.

It’s a top-quality business with a cheap valuation. Right now, I can snap up some shares trading on a trailing price-to-earnings ratio of just six. It also boasts a 6.8% forecast dividend yield. That comfortably surpasses the FTSE 100 average of 3.9%.

What’s more, it could be argued that now is the best time to buy BT as investors turn their back on the stock. After all, the business is going through a transition phase as it moves to a digital future and a streamlining of its operations.

As part of this, there’s a large push to cut costs. Its transformation programme has delivered £2.5bn in annualised savings and it’s on track to meet its £3bn savings target by FY25. That shows it’s making solid progress.

In its latest annual report, it stated that “every team across the business is tenaciously pursuing our transformation agenda.”

A justified decline?

That’s all very well, but I’m inclined to agree with the wider market. I’m not sure BT is the opportunity it looks like on paper.

As an investor who’s trying to build up his second income, the yield is tempting. But I think it’s too risky to buy a stock for passive income when a declining share price could wipe out all my gains.  

The firm faces numerous challenges going forward. Overcoming them will be a serious uphill battle. With that, I’ll be looking elsewhere on the FTSE 100 for my next buy.

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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