The Motley Fool

BT Group plc Could Be Worth 656p

It seems like only yesterday that BT Group (LSE: BT-A) (NYSE: BT.US) was struggling to prop up its pension fund and losing precious cash from its own bottom line in the process. The share price took a tumble, too, and was on the slide from 2007, as a falling stockmarket hit the value of the fund’s assets — BT shares slumped 75% in less than two years.

But since the depths of 2009, the price has recovered strongly to today’s 399p — that’s a five-bagger if you managed to get in at the bottom.

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Further to go?

BTBut even after that, with earnings per share (EPS) rises of 4% and 9% being forecast for the next two years, BT shares are on a slightly below-average P/E of 13.6 for the year to March 2015, falling to 12.5 a year later.

Could BT shares still be a bargain? I think so. Let’s see what they might be worth in five years time…

Admittedly, forecasts beyond the current year tend not to be too reliable, and the further out we get the ever more tentative they become. But this is just for fun, and we do at least have finger-in-the-air predictions out to 2019.

Show me the money

They suggest we could be seeing EPS of 41p per share by then, which would be 45% up on 2014’s figure. If we assume a recovery to the FTSE long-term average P/E of around 14, that alone suggests a share price of 574p. That’s up 44% on today’s price, which wouldn’t be a bad return for a five-year investment.

And it would be significantly better once dividends are included too. If the analysts’ guesswork proves correct, we’d have another of 82p in cash to add to the pot, taking the total value of a BT share up to 656p. That would provide an overall gain of 64%, which really is good for five years — and you’d do better still if you invested your dividends in new shares each year.

Will it happen?

How realistic are these growth expectations? At annual results time in May, the company was pretty upbeat, saying “We are confident we will achieve our goal of sustainable, profitable revenue growth“, with chief executive Gavin Patterson telling us that “we now expect to increase our dividend by 10%-15% for each of the next two years“.

We’re coming out of recession too, which considerably lessens the risks. BT does look pretty good value to me these days.

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Alan does not own any shares in BT Group.