This Week’s Top Blue-Chip Income Buy: BT Group plc

BTI’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors. A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term.

Right now, I reckon BT Group (LSE: BT-A) (NYSE: BT.US) is looking a great buy for income.

High growth attraction

Income investors often gravitate towards shares offering a high yield. But high yields can mean lower dividend growth, and sometimes portend a cut. I think there’s always room in an income portfolio for a few companies with a more average yield, but prospects of strong income growth.

BT Group has a chequered past as far as dividends are concerned. However, the company has made great progress in recent years, both as a business and a dividend payer, as the table below shows.

  2009/10 2010/11 2011/12 2012/13 2013/14
Normalised free cash flow (£m) 2,032 2,076 2,307 2,300 2,450
Declared dividends  (£m) 534 574 654 749 879
Declared dividends per share 6.9p 7.4p 8.3p 9.5p 10.9p
Growth 6.2% 7.2% 12.2% 14.5% 14.7%

When announcing its 2011/12 results, BT had said: “As a result of our confidence in our ability to grow free cash flow, we intend to increase the dividend per share by 10%-15% per year for the next three years”.

In its latest (2013/14) results, BT’s Board extended the horizon for strong dividend growth, saying “we now expect to increase our dividend by 10%-15% for each of the next two years”.

City analysts reckon BT will actually deliver increases above 15%, but if we’re more conservative than them and work on the basis of 15%, we get dividends of 12.5p for 2014/15 and 14.4p for 2015/16.

A great opportunity right now

The market applauded BT’s last annual results and the Board’s extension of the high-growth dividend guidance. The shares subsequently traded well north of their current level of 362p, reaching above 400p at their height. After a fall of 9% over the last four weeks  the shares are now changing hands at a price not seen since before the company extended its dividend policy.

The result is that the current-year yield (assuming a 12.5p payout) has risen to a market-average 3.5%. So, we now have a situation where BT is offering an average yield, but with an expectation of well-above-average dividend growth. Furthermore, free cash flow cover of the dividend is very healthy indeed. Hence, I rate BT a great buy for long-term income investors right now.

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G A Chester 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.