The BT Group (LSE: BT.) share price has been on a tear this year, climbing an impressive 34% since January. That puts the stock near a five-year high — a level not seen since the pandemic. The question now is whether there’s still value left for investors, or if the best gains are already in the rear-view mirror.
What’s driving the growth?
The recent surge can be attributed to several factors. BT’s ongoing restructuring plans have started to bear fruit, with efficiency drives improving profitability. Subsequently, Morgan Stanley lifted its price target on BT shares in late May, helping to fuel optimism.
Investors have also been encouraged by BT’s efforts to focus on core operations and find ways to unlock value. Most notably through potential strategic moves involving its infrastructure arm Openreach.
There’s certainly no shortage of headlines. Earlier this month, speculation resurfaced that BT could spin off Openreach, which operates the UK’s broadband network. Such a move could help improve prospects for shareholders. The company’s also been linked to a possible takeover of broadband rival TalkTalk, hinting at a possible boost to its retail customer base.
However, not all the news has been upbeat. BT revealed plans to cut up to 40,000 jobs by the end of the decade, largely due to automation and artificial intelligence (AI) taking over manual tasks. While this is a clear cost-saving measure, it’s a sensitive matter that risks hurting the company’s reputation and irking investors.
Financials
Looking at the numbers, BT’s financial picture’s a mixed bag. Earnings have grown at a rate of 25.8% year on year, even as revenue continues to contract, reducing by around 2.23% annually. This suggests cost-cutting efforts are working but longer-term growth still needs reviving.
Debt remains the elephant in the room. The company carries a hefty £20.32bn of debt on its books, almost double its equity. With only £6.17bn in operating cash flow last year, debt obligations risk limiting the company’s expansion goals.
Income potential, at a cost
Valuation-wise, the shares look slightly stretched after the recent rally. The shares trade at a price-to-earnings (P/E) ratio of 18.6, which is higher than that of many traditional UK telecom stocks, and its price-to-book (P/B) ratio stands at 1.49. That suggests the market’s already priced in a fair bit of optimism.
Still, for income, it remains a viable option. BT offers a dividend yield of around 4.15%, with a payout ratio of 75.7%, indicating the dividend’s reasonably well-covered by earnings.
For income investors, that’s a compelling factor, especially given the defensive nature of telecoms.
Worth considering?
All told, while the rapid share price growth means some of the easiest gains may have already been captured, BT remains a sturdy business with clear income potential. The balance sheet‘s a concern, and the valuation’s no longer as cheap as it was six months ago.
Still, for investors seeking a blend of defensive characteristics and regular dividends, it may be worth considering as part of a diversified income portfolio.
