BT (LSE: BT) shares were top of my watchlist a year ago, and I came close to buying. I thought they looked cheap, with a forward price-to-earnings (P/E) ratio of just 6.75 and a forecast yield of 7.36%.
That’s exactly the profile of the FTSE 100 stocks I’ve been buying, but I hesitated.
The shares had just jumped 20%, and I convinced myself the moment had passed. It felt like the early stage of a recovery, which is typically the most lucrative part, and I didn’t want to chase it.
I noted the long-term underperformance, the costly pension liabilities and BT’s £20bn debt pile. UBS had even warned that the dividend could be cut in half. So I stepped back, again.
Full-year jump
Shortly after, full-year 2023 results landed. I expected a sell-off after a 31% fall in profits, but the market had other ideas. The shares climbed another 10% in a day.
Chief executive Allison Kirkby hiked the dividend 3.9% and talked up plans to double free cash flow to £3bn by 2030.
Annoyed at missing that jump, I moved on.
That turned out to be the wrong call. A quick glance at the BT share price one year on hurts like hell. It’s up almmost 40%, comfortably beating the FTSE 100, which climbed a modest 6.2% over the same period. The trailing yield is 4.55%, well above the index average of 3.6%.
Results for the year to 31 March 2024 were mixed. Revenues dipped 2% to £20.4bn, held back by weaker international and handset sales, although Openreach and broadband price rises helped. Adjusted EBITDA rose 1% to £8.2bn, while pre-tax profit increased 12% to £1.3bn, thanks to fewer one-off costs.
Normalised free cash flow beat forecasts at £1.6bn, and the dividend was increased again, this time by 2% to 8.16p per share. Net debt is down to £15.2bn.
There’s momentum here, and the company is now just a year away from hitting its £2bn free cash flow goal for 2027.
A sector with pitfalls
But telecoms is a tough business. Investment costs are sky-high and competition intense. BT still carries major risks – it’s still got those hefty pension commitments. Its Openreach network bleeds customers amid stiff competition from smaller, nimbler ‘alt-net’ rivals, with a thumping annual decline of 828,000. That’s expected to continue.
BT also faces tougher competition in the mobile market as Vodafone and Three line up a £15bn mega-merger.
After a strong run for its shares, broker forecasts suggest slower growth ahead. The median 12-month price target sits just under 197p, around 10% above today’s 179p. Add in the yield, and that could deliver a total return of 15%.
Yet analyst sentiment is split. Seven rate the stock a Buy, but four say Hold and four say Sell.
BT shares now trade on a forward price-to-earnings ratio of 9.25. Not quite the screaming bargain they were, but still decent value.
A year ago, I said I’d left it too late. That was a bad call. Now I feel that I’ve really missed out and won’t be buying. Instead, I’ll start looking for the next FTSE 100 recovery play. Let’s hope I’m not kicking myself this time next year, too.
