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Is BT Group plc A Promising Capital-Growth Investment?

BTOff the top of my head I’d say fixed line telecoms company BT Group (LSE: BT-A) (NYSE: BT.US) has some growth prospects, but not stunning growth prospects, and I’d hardly classify the firm as a growth company.

In fact, City pundits analysing the company’s potential only have earnings growth of 4% and 7% pencilled in for years ending March 2015 and 2016 respectively. I like to see earnings growing in excess of about 15% per annum in my growth investments. BT Group is probably best described as a slow-grower, or on a day when we are feeling generous, a stalwart.

But BT is a big name

I can see why conservative-minded investors might restrict their search for growth to the FTSE 100 companies as investing in big, well-known names might feel safe, and the first rule of money management is to preserve capital. In the restricted reservoir of the FTSE 100 choices, BT’s forward-growth predictions might seem positively fizzing.

However, the safety net of ‘large’ is nothing but an illusion. BT itself has a hidden investor nobbler that could jump out and strike at any moment. That comes in the form of the firm’s cyclicality. As well as having something of a utility type operation, the firm’s services are discretionary too. Customers don’t have to use fixed-line telephone and broadband services at all, and in hard economic times, many choose not to. The internet and telephone service gets the chop before the water and the electric in most cases.

We can see evidence of BT’s cyclicality in the way earnings collapsed in the wake of the credit crunch, but to be fair demand for internet and other services seems to have driven earnings way up and beyond previous earnings’ highs since then. Indeed, BT has posted some impressive earnings’ growth figures in recent years, driving the share price from a nadir of around 80p during 2009 to today’s 382p:

Year to March

2010

2011

2012

2013

2014

Adjusted earnings per share

17.3p

21p

23.7p

26.3p

28.2p

Earnings’ growth

8%

21%

13%

11%

7%

A perky growth rate achieved during 2011 has declined since then, and forward predictions for growth between 4% and 7 % could easily be the new normal for BT. Whatever the size of the market potential, until we see rising, and sustainable growth figures recordable historically, it’s all jam tomorrow.

A bit on the expensive side

Given that forward visibility only illuminates growth of 7%, I think the shares are a little too expensive. The forward P/E rating is running at just over 12 for 2016 with the dividend expected to yield around 3.8%.

I’m fond of adding the forward yield to the forward rate of earnings’ growth to arrive at a fair valuation multiple and, on that basis a P/E rating of about 11 would seem more comfortable. In any case, given the modest growth forecast, I think BT is best valued by examining the dividend payout – I’d want the yield to be higher before investing.

BT Group’s shares have enjoyed a decent run up and it wouldn’t surprise me if they take a protracted breather now, which could present value-hunters with a better opportunity down the road.

What now?

When it comes to seeking out decent growth investments, I think it’s best to look beyond the FTSE 100, and firms like BT, to smaller, more vibrant players listed on the London market.

That's why I'm keen on a 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.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.