The BT Group (LSE: BT.A) share price quickly fell 4.5% on Thursday morning (30 January), in response to the telecom giant’s Q3 update, though it regained about half of that by close.
The dip will have been exaggerated a bit by optimism pushing the shares up the previous day in anticipation.
Openreach up
BT has been making a big thing of its Opeanreach full-fibre broadband rollout over the past year. And to be fair, I’m impressed how well it’s done. The connections have all been laid along my street, and I intend to sign up when it’s available.
In May last year, CEO Allison Kirkby famously told us: “Having passed peak capex on our full fibre broadband rollout and achieved our £3 billion cost and service transformation programme a year ahead of schedule, we’ve now reached the inflection point on our long-term strategy.”
That marked a key milestone, and the bulk of 2024’s share price gains came almost straight away.
Opeanreach is still storming ahead. The latest update told us of “over 1m premises passed in the quarter for a fourth consecutive quarter.” And it seems BT is on track to reach 25m premises by the end of 2026.
Revenue down
But then come the numbers with pound signs in front of them. Adjusted revenue in the quarter fell 3%, with a similar fall in the nine months to December 2024.
Adjusted EBITDA looked better, gaining 4% in the quarter and 2% year-to-date. But that was in part “driven by strong cost transformation.” And there’s only so much a company can do with cost reductions to boost profits. Long term, it has to come from growing revenue.
Still, this is just a single quarter. I’d never make a buy or sell decision on something so short term. And the CEO did tell us that “BT’s continued delivery means we remain on track to deliver our financial outlook for this year and our cash flow inflection to c.£2bn in 2027 and c£3bn by the end of the decade.“
I just don’t think the negative market reaction is justified. But there’s one thing that always nags at me about BT.
Dividend puzzle
To my simple mind, dividends should come from cash surplus to operational needs and capital expenditure (capex). If a company can’t use it to generate superior returns, it should go back to shareholders through dividends or share buybacks.
But I’m not really seeing surplus cash here. Capex last year came in at £4.9bn, interest payments cost £865m, and BT repaid £1.68bn in borrowings. Net debt reached £20.3bn by 30 September 2024. Yet BT paid out £757m in dividends.
Still, if I wait until I understand 100% the reasoning behind a company’s shareholder strategy, I’ll probably never buy anything. So if I want to invest for dividends, maybe I should just stump up and pocket the expected 5.6%. I might just do that.
And I do see long-term potential in the BT share price now, though I’d say the main risk still comes from needing to see all this expansion to turn into bottom-line earnings growth.
