Is telecoms giant BT now a no-brainer stock for passive income?

This time, BT ‘smells’ different, and I finally believe it may make a decent investment for passive income from the dividend.

| More on:
Young female business analyst looking at a graph chart while working from home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT‘s (LSE:BT.A) shot up since May’s bullish update and outlook statement from the company, but the stock still looks attractive for passive dividend income.

With the telecom company’s share price near 139p (26 June), the forward-looking dividend yield for the trading year to March 2026 is almost 5.8%.

That’s tempting in itself. But after chief executive Allison Kirkby’s assessment last month, I reckon there’s a good chance of incremental dividend growth in the coming years.

Recovery and growth

So shareholders may be able to lock in a decent and growing passive income from that dividend. But there’s the possibility of capital gains from a rising share price too.

It’s happened before. BT looked like it was on the floor in spring 2009 after the credit-crunch and during that decade’s ‘great’ recession. But between then and the end of 2015, the stock rose by more than 500%.

However, one of the ongoing worries is the company’s mountain of debt on the balance sheet. That’s been fuelled by the need to invest so much money into next-generation networks, including the massive full-fibre broadband rollout.

So Kirkby’s assertion that the firm has now passed peak capital expenditure (capex) on the fibre network came as a relief to the market. I reckon that’s what the strong rally in the shares has been all about.

Such sudden moves higher often put off value-oriented investors. That’s understandable. But one argument is the fundamentals and outlook of the business have improved. Therefore, the up-rating looks justified.

The company’s £3bn cost and service “transformation” programme was completed a year ahead of schedule. And the business has reached “the inflection point”, regarding its long-term strategy, Kirkby said.

Increasing free cash flow

It’s been well reported, but now the firm reckons it can more than double its normalised free cash flow over the next five years.

Nothing’s guaranteed and the business may yet run into more unforeseen challenges along the way. For example, a down-turn in the economy would almost certainly sink the share price again.

Nevertheless, forecasts for better free cash flow strike me as a supportive factor for ongoing growth in the dividend – perhaps the most important factor of all.

After years of nose-wrinkling, I’m finally starting to believe that BT may be capable of passing my sniff test. Things feel different to me now. This turning business may be entering an enduring period of recovery and growth (I hope).

Looking ahead, Kirkby said the company’s sharpening its focus and “accelerating” the modernisation of its operations. It’s also aiming to optimise its global business operations.

Overall, Kirkby reckons BT’s now positioned to generate “significant” growth. And, on balance and despite the risks, I think the stock has the potential to deliver decent passive income for its shareholders via an ongoing stream of dividends.

However, despite my enthusiasm, I’d stop short of calling it a no-brainer because all stocks have the potential to disappoint as well as to delight. But I see it as worthy of further research.

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.

Kevin Godbold 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.

More on Investing Articles

Investing Articles

Down 23%! Should I buy more CrowdStrike shares for my Stocks and Shares ISA?

Sometimes bad news can be good news for long-term investors. But is that the case for CrowdStrike in relation to…

Read more »

Investing Articles

2 UK shares near 52-week lows I’m considering snapping up

These UK shares are loitering near, or at, 52-week lows. Are these prime opportunities for our writer to boost her…

Read more »

Investing Articles

Unilever: a passive income stock with potential for decades of dividend growth

Stephen Wright thinks Unilever can keep reducing its share count for years to come. And this should help make it…

Read more »

Middle-aged black male working at home desk
Investing Articles

Worried about retirement? I’d buy high-yield dividend shares to build wealth

The number of pensioners enduring poverty in the UK looks set to rise. Investing in dividend shares could help Britons…

Read more »

Investing For Beginners

2 boring but beautiful FTSE 100 stocks to add to my ISA

Jon Smith runs over a couple of FTSE 100 stocks that he really likes the look of, even though they…

Read more »

Investing Articles

Here’s how I could supercharge my wealth by snapping up the best dividend stocks!

This Fool explains how dividend stocks play a crucial part of her aspirations to build wealth, and details one pick…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Revenue up 10% and accelerated growth potential for this overlooked FTSE 250 company

Today's first-quarter update from this good-value FTSE 250 company keeps me keen on the stock as recovery and growth continues.

Read more »

Investing Articles

Here’s why I’m so bullish about the BT share price now

The BT share price shot up after FY results, and a couple of months on it's still up there. Might…

Read more »