BT (LSE:BT.A) shares have got the New Year off to a flyer, rising 9% in value since 1 January. Over a 12-month horizon, the FTSE 100 telecom giant’s up a whopping 33%, comfortably beating the broader index.
BT continues to struggle on the sales front, reflecting the tough economic climate and intensifying market competition. So why is its share price flying? In a nutshell, investors are impressed by the execution of its self-help strategy, and are hopeful it could restart earnings by boosting sales and cutting costs.
The question is, can BT’s shares continue ripping higher? Or has the market got overexcited and left the company in danger of a price correction?
Strong forecasts
A look at BT’s earnings and dividend forecasts could yield clues as to where its share price might be heading next.
City analysts think annual profits will fall 7% in the financial year to March 2026. However, they’re tipping earnings to rebound 4% over the following 12 months and rise another 5% in fiscal 2028 as those streamlining measures pay off.
These bright predictions mean dividends are also tipped to continue rising. Last year’s dividend of 8.16p per share is expected to increase to 8.31p this time out, before advancing to 8.35p in 2027 and 8.6p in 2028.
Just how realistic are these estimates?
Could dividends be cut?
First, let’s look at those dividend forecasts. On the plus side, predicted payouts for the next three years are covered between 2.1 times and 2.2 times by expected earnings. These are just above the security of benchmark of two times, providing a margin of error if earnings underwhelm.
However, BT’s battered balance sheet throws a massive curveball into the mix. Net debt rose again in the six months to September, up 8% to £20.9bn. The firm’s operations are famously expensive to run, and with a huge pension deficit as well, it’s possible dividends could be sacrificed help the company get debt under control.
BT has frozen and slashed dividends several times already over the past decade, reflecting these pressures. More drastic action can’t be ruled out. And that could see investors dump the stock, sending its share price lower.
Are BT shares a buy?
I’m also mindful there’s a good chance that earnings could miss City targets over the near term. Revenues continue to slump, down 4% in the three months to December, with sales still falling at the Consumer line of business (down 1%) and accelerating lower in Business (down 6%).
Unless BT gets to grips with this, those predictions of earnings growth will start to look flaky.
But let’s take a step back a minute. It’s not all grim over at BT — its Openreach unit continues to impress, and it added another 571,000 fibre customers in the last quarter, ahead of target. Meanwhile, the company’s restructuring plan is progressing well, putting it on track to hit its £3bn cost-cutting goal.
However, these successes don’t mean that I plan to buy BT, given its other problems. And especially considering how expensive the stock now is. Its price-to-earnings (P/E) ratio is 11.5 times, above the 10-year average of 8.8.
Could BT shares be worth considering today? Absolutely. But only from investors with higher risk tolerance than myself.
