BT (LSE:BT.A) shares have done quite well in the FTSE 100 in the past couple of years. In fact, they’re up 76% in just the past 18 months!
However, the stock’s come off the boil a bit lately, falling 16% since July. Is this a good time for me to add the telecoms giant to my ISA?
Bull case
When I look at BT as a potential investment, I see a couple of things that appeal to me. One is the dividend, with the forward-looking yield currently sitting at a respectable 4.4%.
Moreover, the dividend’s covered more than twice over by prospective earnings, suggesting a strong likelihood the payout will be met, while also leaving room for potential increases in future. Neither’s guranteed though, of course.
Also, BT’s passed the peak of capital expenditure for its full-fibre broadband rollout in the UK. Therefore, free cash flow has the potential to grow meaningfully in future years. This might support juicy dividend hikes.
Third, CEO Allison Kirkby has kicked off a massive automation and artificial intelligence (AI)-driven efficiency drive, targeting more than 40,000 job cuts by 2030. Obviously, that’s not great for people losing their jobs, but from a financial perspective, it could save around £3bn.
Finally, the valuation looks cheap here. The stock’s trading on a forward price-to-earnings ratio of just 10.5. Management thinks the share price undervalues the business, and there’s chatter that BT’s broadband network business Openreach could be spun off.
Bear case
Turning to the bear case, my first concern is the lack of meaningful revenue growth. Cuts and efficiency drives are all well and good, but without top line growth, they will only ever go so far.
I’m always amazed when I look at BT’s annual revenue, and not in a good way. In FY22, it came in at £20.8bn, followed by £20.7bn, £20.8bn and £20.4bn in the three following years. This year? It’s forecast to be £20bn!
Of course, one might argue this consistency points to the ultimate steady-Eddy business. On the other hand, it doesn’t really whet my appetite for the stock.
Another worry I have is the company’s mountainous debt pile. Net debt’s around £20bn, so paying this down is going to take a long time.
Perhaps the biggest risk I see is rising competition from alternative forms of internet. For example, Fixed Wireless Access and, to a lesser extent, mobile phone hotspots. Then there are ‘altnets’ like CityFibre, which are building their own fibre networks, directly challenging Openreach’s grip on fixed-line broadband.
One long-term threat at the back of my mind is Starlink, SpaceX’s satellite constellation. What if this service becomes a lot cheaper in future and more people start signing up? So whether you’re on a rural farm in Northumberland or a flat in central London, Starlink gets you online without touching BT’s infrastructure.
My verdict
Weighing things up, I think the negatives outnumber the positives for me here. Looking around the market right now, I see plenty of other UK shares that I’d rather buy and own over the next five years.
