Should I Invest In BT Group plc Now?

Can BT Group plc (LON: BT.A) still deliver a decent investment return?

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Last month’s half-year report shows continuing progress on free cash flow generation and net debt reduction at BT Group (LSE: BT-A) (NYSE: BT.US), the fixed-line telecoms company.

That’s just what we want, because it takes hard cash to reward investors through the dividend, and cash-draining nasties such as borrowings suck cash away from investors’ pockets.

A good financial performance

During the first half of the firm’s financial year, BT Group increased its normalised free cash flow to £655 million, up 19% on the year-ago figure. The firm also reduced its borrowings by almost 5% to £9,241 million. Thanks to a rising cash balance in the bank, the net-debt result is even more impressive, down 12.5% to £7,063 million.

We can’t argue with a firm’s cash performance — it’s the best measure of whether a company is creating value through its operations or not. BT Group is, and to emphasise the point, the firm raised the interim dividend by a hefty 15%. At this rate, year to March 2015 looks set to be another barnstormer.

BT is having a good decade, and an improving financial performance drove the share price from a nadir of around 80p during 2009 to today’s 381p:

Year to March

2010

2011

2012

2013

2014

Net cash from operations (£m)

4,825

4,566

3,558

5,295

4,796

Net borrowings (£m)

11,339

9,505

10,155

9,089

9,119

Growing operations

BT Group’s chief executive puts the firm’s good performance down to the impact of BT Sport, where Premier League audiences are up around 45% on average. Fibre also drives growth, as the firm sees one in three of its retail broadband customers enjoying super-fast speeds. Now, more than 21 million premises are connected and the growth-rate remains brisk. There’s strong demand across the market for the faster speeds that fibre offers, he reckons.

To service the demand, BT aims to recruit an additional 500 engineers in its Openreach division. That begs the question, are these engineers already qualified and trained, or will they be fast-tracked through a weeks-long induction process and released into the field with the green paint still wet behind the ears, which really wouldn’t be fair on them?

We may joke, but not training staff properly can lead to all sorts of problems for the business and its customers and, BT has something of a reputation to live down on that issue, whether deserved or not. With luck, if inadequate training has been an issue in the past, BT will already have learnt from past lessons.

What next?

BT trades with a forward P/E rating just over 12 for 2016. The forward dividend yield is around 4% and city analysts expect earnings to grow 7% that year and cover the payout more than twice.

The firm seems set to continue to benefit from a rapidly digitalising world, and the current market valuation appears modest given its potential for continuing steady growth. That said, there is a cyclical element to BT’s operations as evidenced by the profit collapse we saw in the recent recession.

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.

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.

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