How BT Group plc Could Surge A Further 79%

BTThe shares of FTSE 100 telecoms firm BT Group (LSE: BT-A) (NYSE: BT.US), currently trading at 364p, have risen a massive 328% over the last five years, smashing the 57% gain of the index.

But there could still be strong gains to come over the next five years, as BT’s shares have the potential to surge a further 79%.

Here’s how

There was a time when BT was thought of as a small telecoms business attached to a giant pension scheme, the legacy of its history as a state-owned company.

Fears that BT could be sunk by its pension obligations were rife five years ago: the pension deficit had reached £8bn — bigger than the company’s market capitalisation — and, to make matters worse, bank borrowings and other debt had ballooned to £13bn.

The deficit and debt remain substantial, but look much better now because the post-bear-market recovery of BT’s shares has taken the market capitalisation up to almost £30bn. The company has also agreed a long-term plan with the pension trustees to close the deficit.

As you might suspect from the magnitude of BT’s share gain over the last five years, the company’s progress rests on more than just a bull market floating all boats and a deal on the pension scheme. The business itself has made great strides. Management reported further strong progress in annual results announced earlier this month, boasting:

“Underlying revenue, adjusted profit before tax and normalised free cash flow have all grown and beaten market expectations”.

City analysts are optimistic BT is well positioned for continuing strong growth. The analysts are forecasting that earnings per share (EPS) will increase from last year’s 28.2p to 40.6p by the year ending December 2018 — a total increase of 44%.

If the shares track earnings, and continue to rate on their current trailing price-to-earnings (P/E) ratio of 12.9, the price will of course rise by the same 44% as EPS, putting BT’s shares at 524p five years from now.

However, the re-rating of BT that’s been going on over the past five years could well continue. If BT re-rated to the FTSE 100’s long-term average historic P/E of 16, we’d see the shares at 650p — a 79% rise from today’s 364p.

Investors would also bag five years of dividends. Analysts see a total of 82p a share paid out over the period. Put another way, a £1,000 investment in BT today would deliver £225 in dividends.

Of course, none of this is guaranteed. However, history tells us that companies are capable of delivering the kind of return I've outlined here -- or even higher.

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G A Chester does not own any shares mentioned in this article.