BT Group (LSE: BT.A) shares have been on a tear recently. They’re up 23% in six months and 61% over a year.
Over five years, the return is around 54% without dividends, so this FTSE 100 stalwart has certainly come back into fashion among some investors.
Nevertheless, I still can’t bring myself to invest in it. Here are four reasons why.
Low growth
CEO Allison Kirkby has done a good job so far. Under her leadership, BT has implemented cost-cutting measures and sold off non-core assets. She has been advocating for regulatory reforms to speed up the deployment of digital infrastructure.
Kirkby has also been actively steering the company to concentrate on just its UK operations. While that could make it leaner and more focused, BT will then be operating in the slow-growth domestic telecoms sector.
In January, the firm said it remains on track to deliver free cash flow of about £2bn in 2027 and £3bn by the end of the decade. As a result, the share price could keep chugging higher.
Longer term though, the fact that BT is operating in a market with poor growth prospects turns me off. Next year’s revenue forecast is £20bn, the same as this year (and last year).
Dividend yield
Next, the income on offer doesn’t seem too enticing. After the strong share price appreciation, the dividend yield is just 4.6%
On the flip side, the forecasts look good, with the yield potentially rising to 4.8% next year. The payout looks well-covered by anticipated earnings too.
However, I typically look for yields in excess of 5% with dividend stocks. For example, I’m satisfied to overlook Legal & General‘s sluggish growth when it’s sporting a 9% yield. BT’s is almost half this.
Finally, the telecoms giant has a track record of cutting its dividend every now and then. So that doesn’t fill me with confidence.
Massive debt and liabilities
Third, BT still has a massive debt pile. Recently, net debt stood at a whopping £20bn. For context, that’s more than the £17bn market cap.
The company’s pension liabilities also remain a long-term problem. Last year, they were the largest of any UK company, according to the Financial Times. Yikes.
Rising competition
A final concern I have is mounting competition, especially from so-called “alt-nets” (alternative networks). These are independent broadband providers that operate outside the UK’s traditional infrastructure, including BT’s Openreach.
These threaten to erode the group’s market share in broadband and put pressure on pricing power. Analysts at Citi expect Openreach’s revenue to decline over the coming years as competition mounts and customers have more choice.
Earlier this month, UBS said: “We reiterate our view that BT is seeing rising broadband infrastructure competition that is putting pressure on both Openreach and Consumer revenues and we think Openreach needs to deploy fibre faster.”
Both brokers rate the stock a Sell. However, it should be noted that quite a few other analysts rate the stock as a Buy.
Still, when I weigh up rising competition with slow growth, a hefty debt load, and a modest 4.6% yield, the stock doesn’t appeal to me. I think there are better options for my portfolio.
