A £20,000 lump sum invested in BT (LSE: BT.A) shares two years ago would today be worth around £45,105, with dividends included.
That is a gain of £21,940 on the share price, plus a further £3,165 in dividends, giving a total return of almost 126%.
But the valuation still looks unusually depressed given the operational progress coming through. So, how much can be made from this price-to-valuation gap going forward?
Mind the gap
Share prices rarely reflect the ‘fair value’ of the underlying business. Instead, they are a function of market supply and demand for a stock.
However, over time share prices tend to converge to their fair value and this can spell major profits for long-term investors.
Discounted cash flow analysis identifies the price at which any stock should trade. It does this by projecting future cash flows of the underlying business and ‘discounting’ them back to today.
Some analysts’ DCF modelling is more bearish than mine, depending on the variables used. However, based on my DCF assumptions — including an 8.7% discount rate — BT shares are 50% undervalued at their current £2.16 price.
That implies a fair value of around £4.32 — double where the stock trades today.
And because of the long-term relationship between a share’s price and fair value, this suggests a potentially terrific buying opportunity to consider today if those DCF assumptions hold.
Dividend returns forecast to rise
BT’s current dividend yield is 4%, comfortably above the present FTSE 100 average of 3.1%.
However, analysts forecast this will rise to 4.2% this year and remain around that level over the medium term.
So, those considering a £20,000 investment would make £10,417 in dividends after 10 years and £50,353 after 30 years. This assumes the forecast 4.2% as an average, although yields can go down as well as up. It also factors in the dividends being reinvested back into the stock to harness the power of ‘dividend compounding’.
At the end of 30 years, the total value of the holding would be £70,353, and this would pay a yearly dividend income of £2,955.
How does the core business look?
A risk for BT is slower‑than‑expected migration to full‑fibre, which could limit the average revenue per user (ARPU). Another is any delay or failure in BT’s cost‑cutting and automation savings plans that could affect expected margin improvements.
That said, the consensus forecast of analysts is that the company’s earnings will grow a strong 15% a year to end-2028 at minimum. And it is this that ultimately powers any firm’s share price and dividend gains.
Its latest major results (H1 of fiscal year 2026) saw Openreach add 1.1m net fibre‑to‑the‑premises connections. Broadband ARPU rose 4% year on year to £16.7, illustrating the earnings uplift from full‑fibre take‑up and improved speed mix.
BT also delivered £247m of gross annualised cost savings, underlining how its transformation programme is directly improving margins.
My investment view
BT offers a rare combination of deep undervaluation, rising full‑fibre economics and a clear path to stronger cash flow, in my view.
The earnings engines are now clearly visible, the dividend is growing, and the transformation programme is delivering ahead of plan.
For those reasons, I will be buying more of the shares myself and think them worthy of other investors’ consideration too.
