BT (LSE:BT.A) is beginning to rebuild its reputation as one of the FTSE 100‘s more popular dividend shares.
Dividends were reduced at the turn of the decade, before being cut entirely in the aftermath of the pandemic. But having restored them to 7.7p per share in the 2022 and 2023 financial years, the telecoms giant raised them to 8p last time out as its fibre rollout programme progressed.
BT explained that 2024 was “the year in which we passed the peak of our capital expenditure on this programme, enabling us to see greater normalised free cash flow over the coming years.“
City analysts are expecting further dividend growth over the next two years too, as shown below.
| Financial Year To March… | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2025 | 8.16p | 2% | 5.1% |
| 2026 | 8.33p | 2% | 5.2% |
As you can see, dividend yields for the period also sail past the FTSE 100 forward average of 3.5%.
So are BT shares a slam-dunk buy to consider for passive income? I’m not so sure.
Dividends are never guaranteed, and the telecoms giant still has substantial issues to overcome. So how realistic are these payout forecasts?
Dividend cover
The first thing I’ll look at is how well predicted dividends are covered by expected earnings. As an investor, I’m seeking a reading of 2 times and above.
Generally speaking, dividend cover around this level provides a wide margin of error in the event that profits are blown off course.
BT doesn’t have the worst score on this front, but similarly neither is it particularly impressive. For 2025 and 2026, cover comes in at 1.7 times and 1.8 times, respectively.
This reading is problematic for me given today’s tough economic climate and high levels of competition BT faces. Adjusted revenues slipped 3% in the nine months to December (to £15.3bn), latest financials showed.
On the plus side however, the firm’s cost-cutting programme continues to deliver impressive results. Last year BT completed its £3bn cost and service transformation programme, a full year ahead of schedule.
Further progress between April and December pushed adjusted EBITDA 2% higher, to £6.2bn.
Financial health
On balance though, I’m far from convinced by BT’s earnings outlook. But this isn’t my only fear for what this could mean for dividends.
The company might be past the peak of its fibre-related expenses. Yet I believe it’s financial foundations remain shaky at best. Net debt continues to tick up, and was a whopping £20.3bn as of September.
That was up almost £600m year on year. And as a result, BT’s net-debt-to-EBITDA ratio was an alarming 4.9 times at the half-year point.
BT’s rising debt is thanks largely to its huge pension deficit (related contributions totalled £800m in the first half). With more hefty pension payments planned in the medium term, there’s a good chance debt could remain at sky-high levels.
The verdict
Despite its attractive yields through to 2026, I’m not convinced by BT’s dividend credentials right now. I think the problems it faces could weigh on payout levels over the near-term and potentially beyond.
Personally speaking, there are many other FTSE 100 stocks I’d rather invest in now for passive income.
