BT (LSE: BT.A) shares are down 5% from their 2 December 12-month traded high of £1.59. It is a rare dip in a stock that has risen 50% from its £1.01 low recorded exactly a year ago today.
So, is now the right time for me to add to my existing holding in the telecommunications giant?
Why has the stock dipped?
BT posted a 3% year-on-year fall to £5.18bn in its results for Q3 of fiscal 2025 on 30 January. This was sufficient to push the stock down on the day.
However, I think this was more than compensated for by a 4% rise in its adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) – to £2.1bn.
Additionally positive for me was a record 472,000 connections to its fibre network in the quarter. Its network now extends to 17m premises and is set to reach 25m by December 2026.
Given these developments, BT retained its full-year 2025 guidance of £8.2bn in adjusted EBITDA compared to £8.1bn last year. Free cash flow (FCF) is expected to be £1.5bn over the period.
It also maintained its forecast that FCF will rise to around £2bn in 2027 and about £3bn by 2030. Such cash reserves can be a powerful engine for growth, in my experience.
A risk here is the high level of competition in the sector that may squeeze its margins.
However, analysts forecast BT’s earnings will increase 17.1% a year to the end of 2027. And it is growth here that ultimately powers a firm’s share price and dividend higher.
Are the shares currently undervalued?
The first part of my BT share price assessment is comparing its key valuations with its competitors.
On the price-to-earnings ratio, it trades at 19.1 against a peer average of 17.4. These companies are Vodafone at 9, Orange at 13.8, Telenor at 19.6, and Deutsche Telekom at 27.3.
So, BT is overvalued on this measure (although it is lower than some peers).
However, it is undervalued on its price-to-book ratio of 1.2 compared to the 1.6 average of its competitors.
And it is also undervalued on the price-to-sales ratio, on which it trades at 0.7 against a 1.2 peer average.
To get to the bottom of its valuation, I used the second element of my price evaluation process. This ascertains where a stock should be trading, based on future cash flow forecasts for a firm.
The resulting discounted cash flow analysis shows BT shares are technically 64% undervalued.
Therefore, the fair price for the stock is £4.19 although market vagaries might push it lower or higher.
The bonus of a good yield
BT paid a dividend last year of 8p, yielding 5.3% on the current share price. This compares to the FTSE 100 average of 3.5% now.
So, investors considering a holding of £11,000 (the average UK savings) in BT would make £7,666 in dividend after 10 years. This would rise to £42,753 after 30 years.
Both results are based on an average yield of 5.3% and on the dividends being reinvested back into the stock.
With the £11,000 stake added, the value of the holding would be £53,753 by 2055. This would pay £2,849 a year in dividend income.
Given the strong projected earnings growth and the solid yield, I will be buying more BT shares very soon.
