The Motley Fool

3 Things That Say BT Group plc Is A Buy

BTBT Group (LSE: BT-A) (NYSE: BT.US) was all the talk a few years ago during the stock market slump, when its pension fund deficit was bleeding the company of cash.

Since then BT hasn’t been making much news. But it’s actually been performing rather nicely, and the shares have been doing well too — over the past five years the price has risen 180% to 373p, while the FTSE 100 has failed to make even 50%.

Since the start of 2014, however, the price has fallen back a bit. So are the shares worth buying? Here’s why I think so:

1. Earnings growth

Right throughout the past five years, BT has been steadily growing its profits, and there’s more forecast. From a pre-tax profit of £1bn in 2010, the telecoms giant grew that to £2.3bn by March 2014 — and forecasts suggest £3.1bn by 2016.

In that time, earnings per share (EPS) has grown from 17.3p to 28.2p, for a rise of 63%. At Q1 time this year the company reported a 7% rise in adjusted pre-tax profit and a 10% rise in adjusted EPS (22% and 27% respectively on a reported basis), so forecasts for a 5% EPS rise for the full year do not look stretching.

2. Dividend growth

The dividend has been boosted year-on-year too, well ahead of inflation. For the year just ended in March, we saw a 15% hike to 10.9p per share. The yield was a modest 2.9%, because the share price had been on the up. But we have further boosts expected for the next two years, of 16% for the current year, to yield 3.4%, and then a further 14% for 2016, taking it up to 3.8% — with yields based on the current share price.

So, rising dividends that are expected to beat the FTSE 100 average yield of around 3%, and that are set to carry on rising? That’ll do.

3. Low valuation

Despite the rise of the past five years, BT’s shares are trading on a forward P/E of under 13 for the year to March 2015, dropping to under 12 based on 2016 forecasts. That’s not as stupidly cheap as a few years ago when you could pick them up on a P/E of under 10, but it’s significantly lower than the FTSE 100’s long-term average of around 14.

On top of that, BT carries only modest debt for its size — £7bn at 30 June 2014, down £979m, for a company with annual turnover exceeding £18bn and with a market cap of £31bn.

It’s boring, isn’t it — it’s just rising earnings and dividends from shares on a low P/E ratio? But come on, what else can we really ask for?

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