BT Group (LSE:BT.A) shares are off to a strong start in 2026. After pulling back from their 52-week high last summer, the telecommunications giant once again started surging this month on the back of impressive earnings, and is now up over 10% year to date, outpacing the FTSE 100’s 7% gain.
But is this just the beginning? With management finally making progress in tackling its excessive debt and operational momentum picking up, could BT shares be getting ready for a massive rally? Let’s find out.
Approaching an inflexion point
In its February trading update, the headline figures don’t scream ‘exceptional’. Revenue was actually down 4% due to the phase out of legacy services and hardware, and underlying earnings also slipped slightly by 1%. Yet despite this, full-year guidance was reiterated.
The firm remains on track to deliver £20bn revenue paired with £8.2bn-£8.3bn in adjusted EBITDA, both supported by improved stability in its Openreach division and its ongoing £3bn cost-cutting programme. But the crucial factor isn’t revenue or earnings, it’s cash flow.
With the buildout of Fibre To The Premises and 5G infrastructure now nearing its apex, 2026 could see capex reach its peak. Following that, capital spending is on track to fall significantly, which, when combined with cost savings, opens the door to a surge in free cash flow.
In fact, by the end of BT’s 2027 fiscal year (ending in March), management projects having an excess of £2bn to work with. And that’s expected to continue expanding to £3bn by the end of this decade. And with this extra level of financial flexibility, debt reduction efforts can accelerate, dividends can grow, and buybacks could emerge.
With that in mind, it isn’t surprising to see institutional investors starting to turn bullish, with one analyst predicting BT shares could climb to as high as 312p by this time next year — a 53.7% potential capital gain!
What could go wrong?
It’s hard not to get excited for the future when seeing BT’s strategy start to pay off. But, like all investments, there nonetheless remain some unsolved issues that create risk.
The first is revenue growth – or rather the lack of it. There are a lot of factors at play, like the discontinuation of legacy services and loss of joint ventures. Regardless, the top line remains stubbornly static, with a large chunk of current sales coming from existing customers switching to newer products.
Sadly, even with newer products offering a superior quality service, BT doesn’t have much pricing power due to the fiercely competitive nature of the telecommunications space. And with Vodafone recently completing its acquisition of Three UK, the rivalry between industry giants has only intensified.
In other words, even if management continues to execute its business transformation efforts well, BT shares could nonetheless plateau if top-line growth fails to materialise.
The bottom line
Without future revenue growth, BT shares are unlikely to keep rising forever. But so long as earnings steadily improve, that may not matter for some investors.
After all, strong cash flow generation and stable profits are both traits that support dividends. And with a yield at 3.9%, conservative income investors might want to take a closer look. But for growth investors, I’ve got my eye on another FTSE 100 stock showing even more promise.
