The BT share price rose 37% this quarter! What’s driving the growth?

The BT share price is on the up. Mark Hartley is considering whether the growth spurt is a one-off occurrence, or is able to continue.

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Since the start of April, the BT Group (LSE: BT.A) share price has increased by 37%. This has been thrilling to watch for shareholders like me, especially considering it spent the first quarter in decline.

The initial growth spurt began in May after it released its FY 2023 earnings results. Revenue remained almost unchanged, with profits falling 31% and earnings per share (EPS) down 55%. Although that sounds bad, it was largely within expectations.

What prompted the growth was CEO Allison Kirkby’s claim that the group had hit an “inflection point” of spending on its nationwide fibre broadband rollout. This means it can now start funnelling profits back into improving operations — and pleading shareholders.

Along with the share price increasing, the yield declined to 5.8%, which is to be expected. However, actual dividends payable increased from 7.7p to 8p per share. Overall, it was a positive result.

The vultures are circling

But let’s not get too excited. There’s still much work to be done. In the past, sudden growth like this has disappeared as quickly as it came. The core fibre infrastructure may be complete but now it’s a case of getting it all working — and keeping customers happy. BT remains the country’s leading provider for now but customers have other options. And they’re fickle.

Competing broadband companies will be waiting for any slip-up to take the crown. And digitising an entire country’s telecommunications network is no easy feat. I would know — I used to work in the industry. So for now, things are looking good, but I think 2024 will remain a tough year for this telecoms giant.

Still cheap

What’s important to note is that the recent growth hasn’t sent the stock into overvalued territory. Far from it. Based on future cash flow estimates, it could still be cheap. Using a discounted cash flow model, there’s consensus among analysts that the stock could be undervalued by as much as 75%.

It has a comparatively decent price-to-earnings (P/E) ratio of 16.4, below that of Vodafone and on par with the industry average. But when I bought my shares near the beginning of the year it was 6.8 — that was a bargain! However, with earnings forecast to increase 58%, the P/E ratio could drop below 10 in H2.

Challenges ahead

But these are all just forecasts and any number of factors could derail them. As a shareholder and an ex-IT specialist, I’m invested in things going well while also aware of the challenges. So I’m keeping a clear head and rational mind about many problems that could arise.

One key point I believe BT will need to focus on is reducing debt. A fibre rollout is no cheap exercise, and it has dragged the company into £18.5bn worth of debt. Shaky markets over the past year mean equity has grown at a slower rate, leaving the company with a 148% debt-to-equity ratio.

That’s not what potential investors want to see. But I’m glad things are finally turning around and I’m excited to see where the stock goes in 2025.

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.

Mark Hartley has positions in Bt Group Plc. 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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