Why BT Group plc Should Beat The FTSE 100 This Year

BTBT Group (LSE: BT-A) (NYSE:BT.US) has been a bit of an unsung hero over the past five years — its share price has trebled to 393p while the FTSE 100 has struggled to beat 30%, and it’s been paying better-than-average dividends.

It’s all been part of BT’s recovery from its pension disaster, which was triggered by the stock market crash. Plunging asset values threw BT’s pension fund into serious deficit, and the company had to shore it up by making large annual payments of around £500m. That plan is still ongoing, but BT is moving on and is seriously back to winning ways.

Earnings going well

Earnings per share (EPS) rose by 7% last year, and that was the weakest for four years — the previous three years had seen double-digit gains. The year ending March 2015 is forecast to bring in just a 3% improvement, but analysts are predicting 8% the following year.

All along, the annual dividend has been steadily boosted, from 6.9p in 2010 to 10.9p last year — and it’s been more than 2.5 times covered by earnings, so it’s looking pretty safe.

But will BT shares really outstrip the FTSE for another year? Over the 12 months from last September, BT shares are up 16% against a little over 4% from the index. But that includes a strong end to 2013, and since the beginning of 2014 things have been a lot closer — so far this year, BT is up 5% against just 1% for the FTSE.

Valuation not stretching

But I reckon BT is in a strong position to finish the year positively.

For one thing, forecasts suggest P/E values of 13.7 and 12.8 for this year and next, and that’s a little below the FTSE’s long-term average of 14. And at the same time, expected dividend yields are ahead of average — 3.2% and 3.6% respectively.

At the end of the first quarter, chief executive Gavin Patterson pointed out that BT’s fibre broadband now covers more than 20 million premises, and that’s an impressively quick rollout. The company is reaching a further 70,000 premises a week, and already has three million customers signed up. That’s keeping BT’s offerings up there with the competition, and providing the platform for what will increasingly become a content-based business.

On the content front, we’re into the second season for BT Sport now, and it won’t cost a penny for BT Broadband customers — BT pulled off something of a coup when it snagged a portion of the UK’s Premier League rights.

A late bull run?

Mr Patterson also said “I’m excited by the launch of BT One Phone for the business market as well as our other mobility plans. We’ll say more on these later this financial year“, so we should be expecting interesting news as the year unfolds.

I’ll be very surprised if BT doesn’t beat the FTSE this year. And next.

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Alan Oscroft 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.