The BT (LSE: BT.A) share price has defied gravity in recent years. Today, it’s defying sense.
After years of poor performance, as investors shunned its sprawling, unfocused operation, BT Group shares have taken off. A good deal of that turnaround has come since CEO Allison Kirkby took the helm in February 2024. She’s cut costs, streamlined operations and refocused the business on profitable areas, while improving transparency for investors.
That’s helped the shares recover from bargain-basement levels, when the price-to-earnings (P/E) ratio slumped to just six or seven, while the dividend yield shot towards 7%.
I was tempted but held back, but bolder investors have been well rewarded. BT shares are up almost 60% over three years and 22% in the last year. They’re up almost 5% this morning (6 November) despite a disappointing Q2 update, and I can’t make sense of it.
Mixed signals from results
BT revealed it lost 242,000 broadband customers in Q2, worse than the 205,000 decline analysts expected. Openreach was hit by tougher competition and a weaker broadband market.
Group revenues fell 3% to £9.8bn, slightly below the £9.9bn consensus, although adjusted EBITDA earnings held steady at £4.1bn. Pre-tax profit dropped 11% to £862m, mainly due to higher depreciation, amortisation and rising interest costs. Capital expenditure rose 8% to £2.4bn, reflecting ongoing investment in its fibre-to-the-premises (FTTP) rollout.
On the plus side, FTTP posted a record 2.2m builds, taking total premises to 20.3m. Demand for Openreach FTTP also hit a record with 1.1m net adds, lifting total connections to 7.6m.
Kirkby said that “BT is delivering on its strategy in competitive markets”, and rewarded loyal investors by increasing the interim dividend 2% to 2.45p per share. She’s sticking to the policy of paying 30% of the prior year’s full-year payout.
Cash flows disappoint
Matt Britzman, senior equity analyst at Hargreaves Lansdown, described the numbers as “failing to shine” as broadband line losses highlight pressure in core markets as rivals step up.
Cash flow disappointed too. So why the baffling early trading share price jump? Britzman concluded: “Expectations were low, and early trading suggests markets are taking a glass-half-full approach, but this update still feels softer than hoped.”
He’s a little mystified. So am I, especially with the FTSE 100 as a whole limping as investors fret over the potential AI bubble. Having said that, the BT P/E ratio is still priced to go at just 9.6, while the trailing 4.33% dividend yield may appeal to income-focused investors.
Broker forecasts are mixed: the median one-year target is 210p, around 13% above today’s price. But only five out of 15 analysts rate it a Buy.
Telecoms is a tough sector. It requires major investment but customers can be poached quickly. BT still carries £20bn of net debt and a legacy pension burden.
Kirkby has done a good job. If she does succeed in cutting 40,000 staff via AI efficiency drives, BT could save £3bn and boost margins. With that in mind, investors could consider this stock but should first make sure they understand what they’re getting into, and I’m not sure I do. I can see plenty of brilliant FTSE 100 bargains that I do understand and would much rather buy today.
