Is Now The Right Time To Buy BT Group plc?

BT Group plc (LON:BT.A) has performed strongly, but certain problems remain a concern.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BTBT Group (LSE: BT-A) (NYSE: BT.US) is a major holding for many private investors, but the firm’s performance over the last decade has been decidedly mixed.

Although BT’s share price has risen by 181% over the last five years, I believe that a number of problems remain, as I’ll explain.

What’s it worth?

Let’s start with the basics: how is BT valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

17.0

2-year average forecast P/E

13.0

Source: Company reports, consensus forecasts

BT shares look fairly expensive on a historic basis, but analysts are pricing in significant growth this year and next, and the firm’s shares look reasonably priced on a forecast basis.

What about the fundamentals?

How has BT performed over the last five years? Let’s take a closer look:

Metric

5-year compound average growth rate

Sales

-2.6%

Pre-tax profit

+22.9%

Adjusted earnings per  share

+10.5%

Dividend

+9.6%

Source: Company reports

These numbers present an interesting picture: it’s probably fair to say that BT was underperforming five years ago, and has since made up some of this ground. The firm’s operating margin has risen from around 10% in 2010 to about 16% last year, and its dividend has grown by nearly 10% per year, in line with adjusted earnings.

Despite this, I still have concerns about BT’s ability to keep growing its dividend, given the other pressing demands on its cash.

Firstly, BT’s pension deficit rose by 24% to £5.6bn last year. This problem will not be allowed to continue indefinitely, and further extra payments are likely to be required at some point, reducing the amount of cash available for shareholder returns.

Secondly, BT still has a pretty hefty debt pile. Although the firm’s level of indebtedness has come down somewhat in recent years, BT’s net gearing, excluding its pension deficit, remains high, at around 145%.

TV gamble

My final concern about BT relates to its decision to invest heavily in BT Sport, its television content offering.

According to BT, operating costs in the firm’s consumer division rose by 12% during the first quarter of this year because of the impact of BT Sport.

BT Sport is currently free to BT Broadband retail customers, with satellite and commercial customers paying subscription fees. I don’t believe this will be enough to fund the channel, but making broadband subscribers pay for it could result in them defecting back to Sky.

Buy, hold or sell?

BT’s profitability has improved in recent years, but I’m concerned by its consistently falling revenues: without top-line growth, BT’s profit growth will eventually be limited.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »