The Motley Fool

Should I Invest In BT Group Plc Now?

BTUnusually among stock market companies, fixed-line telecoms company BT Group (LSE: BT-A) (NYSE: BT.US) is very specific with its outlook statement.

With its full-year results released in May, the firm reports progress with underlying revenue up 0.5%, adjusted profit before tax up 6% and free cash flow up around 6.5%, but there’s more to come according to forward guidance.

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The future looks bright

This year, BT expects revenues to come in flat with further growth the year after. Earnings will be up a little in the current year with growth after that the firm reckons. However, the star performer will be cash flow, up this year and next, they say.

BT puts its good financial performance down to its investment in fibre-optic services. More than 1.3 million took up the option during the firm’s last financial year, almost doubling the number of homes and businesses now connected. The roll-out is ahead of schedule with the company’s fiber network now passing more than 19 million premises, around two thirds of the UK, which strikes me as a market with huge potential.

Britain provides most of BT’s profits but the firm also operates in more than 170 regions abroad. The company’s Global Services division delivers around a third of revenues and one of the firm’s stated aims is to become a global leader in its field, which implies prospects for growth uncapped by UK national geographic boundaries. The Global Services division scored a 9% increase in its order-intake during the recently reported trading year and saw double-digit revenue increases in high-growth territories.

Potential growth abroad and in the home market, set against a backdrop of a rapidly digitalising world, continues to make BT look attractive.

Good performance on investor returns

The directors reckon recent performance provides a strong platform for growth in the years ahead. They pushed up the dividend by 15% to express their confidence. The firm expects to increase the dividend by 10%-15% per year for at least the next two years.

BT’s record of financial performance seems impressive, and the share price has performed well over the period shown:

Year to March 2010 2011 2012 2013 2014
Operating profit (£m) 2123 2578 2919 2948 3145
Net cash from operations (£m) 4825 4566 3558 5295 4796
Dividend per share 6.9p 7.4p 8.3p 9.5p 10.9p

What now?

At the recent share price of 392p BT’s forward P/E rating sits at 12, with City analysts forecasting an 8% earnings’ uplift for 2016. The dividend yield for that year is running at around 3.7% with the payout covered around 2.25 times by forward earnings.

BT Group's valuation looks about right, but we should be mindful of the cyclicality inherent in the telecommunications industry. That's one reason I'm looking at firm's with decent growth prospects, such as this share idea for capital gains from one of the Motley Fool's top small-cap investors. His diligent research has uncovered what looks like one of the best growth shares for 2014.

A strong recovery in profits at this company followed restructuring and the directors predict double-digit margins driving a profits surge in the years to come. We could see the shares delivering total investor returns measured by hundreds of percent over the next few years.

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Kevin does not own shares in BT Group.