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Is Now The Right Time To Buy BT Group plc?

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.

I rate BT as no more than a hold at the moment -- but I may be wrong. If you'd like a second opinion on the best buys in today's market, I strongly recommend you take a look at "Where We Think The Smart Money Is Headed".

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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.