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How Strong Are BT Group plc’s Dividends?

With Vodafone having been in the news so much over the past year or so, led by the Verizon Wireless sale and rumours of big bids for the £50bn mobile phone operator, the UK’s other big listed telecoms operator seems a little neglected.

BTBut BT Group (LSE: BT-A) (NYSE: BT.US) has been doing very nicely.

Over the past year alone, BT shares are up 14% to 384p. And if you’d bought five years ago, you’d be sitting on close to a four-bagger by now while the FTSE 100 has managed a relatively meagre 60%.

Strong earnings

That’s been made possible by steadily growing earnings per share (EPS), with last year’s 10.9p coming in nearly 60% higher than 2010’s reported 6.9p. A proportion of that in turn comes from the firm’s steadily improving pension fund — the deficit faced in the depths of the stock market crash was a bit of a drag on earnings.

With earnings looking so good, we’d expect nice safe dividends, right? Yep, that’s just what we have.

If you’d bought back in 2010, as well as that remarkable share price recovery you’d also have snagged annual dividend yields of 5.6% and rising (with respect to your original purchase price). In fact, over the past three years we’ve seen annual rises of 12-15%.

With a rapidly rising share price, the annual yield has been falling, and by 2014 it was down to just 2.9%. But that was still very close to the FTSE 100’s long-term average of around 3%. And more importantly, it was very well covered by earnings — cover stood at 2.6 times.

What’s next?

What does the future hold?

Well, the City’s analysts have an EPS rise of 5% penciled in for the year to March 2015, with 8% for the following year. That would drop the price to earnings (P/E) ratio to 13 for this year and 12 next, which looks good compared to the FTSE’s average of around 14. But what about dividends?

Writing in BT’s last annual results announcement, chief executive Gavin Patterson told us “Our performance in the year means that we are growing our full year dividend by 15% to 10.9p and we now expect to increase our dividend by 10%-15% for each of the next two years” — so that’s at least two more years of dividend rises in line with recent gains.

Great expectations

The City is expecting something near the top end of that 10-15% range, indicating yields of 3.2% and 3.7% for the next two years. And even after that, we’d still be looking at a dividend covered around 2.3 times by earnings.

All in all, BT’s might not be one of the highest dividends on the market, but it’s looking very safe and it’s growing — and that looks good to me.

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Alan Oscroft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.