2 Hazardous Reasons To Steer Clear Of BT Group plc

In recent days I have looked at why I believe BT Group (LSE: BT-A) (NYSE: BT.US) looks set to hit the high notes (the original article can be viewed here).

But, of course, the world of investing is never black and white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors which could, in fact, put BT’s investment appeal to the sword.

BTSporting arms race undermines profit prospects

BT’s January interims revealed that stunning progress across its broadband and television businesses helped push revenues 2% higher during October-December, to £4.6bn. Despite this, however, as well as the success of its ongoing cost transformation package, earnings before interest, taxes, depreciation and amortisation remained flat at £1.5bn.

The company has been counting the cost of the heavy investments in its BT Sport channels as it bids to take on the might of British Sky Broadcasting. The telecoms giant has splashed the cash over the past couple of years to show the cream of the continent’s sports on its platforms, especially in the football sphere and culminating in the £900m autumn deal to broadcast UEFA Champions League and Europa League games from 2015-2018.

And BT will have to continue spending big in order to maintain this momentum, with the next FA Premier League auction next year potentially creating the next large strain on capital. Although such investment could electrify revenues in future years, BT’s drive to boost its television portfolio — not to mention its broadband network — could be a rolling drain on resources in coming years.

A muddy outlook for income investors

The consensus from City analysts suggests that BT will keep its progressive dividend policy rolling over the medium term, with a full-year dividend of 9.5p per share last year anticipated to rise to 10.8p and 12.4p in 2014 and 2015 respectively. However, these figures only create yields of 2.7% and 3.1%, hardly trailblazing compared with a prospective average of 3.2% for the broader FTSE 100.

In my last article I argued that, although dividend yields are likely to remain uninspiring over the over the next couple of years, that strong payout growth during this period should continue well beyond 2015 as earnings take off. Still, investors should bear in mind that a backdrop of rising capital expenditure and a huge pension deficit could put prospective dividends under pressure, not to mention future share buybacks.  

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Royston does not own shares in any of the companies mentioned in this article. The Motley Fool has recommended shares in BSkyB.