Why Dividend Hunters Should Be Concerned By BT Group plc’s Takeover Of EE

Telecoms giant BT Group’s (LSE: BT-A) (NYSE: BT.US) £12.5bn takeover bid for EE announced this week undoubtedly supercharges the company’s long-term earnings outlook. The ‘quad-play’ services sector — covering the television, broadband, fixed line and mobile telephone spaces — is seen as the next great frontier amid terrific potential for strong product cross-selling.

Although the move also puts to bed the company’s absence from the mobile telecoms market, BT having divested O2 at the turn of the millennium, I believe that this latest deal could see dividends at the capex-heavy firm come firmly under the cosh.

Dividends expected to keep steaming higher

BT has long been a magnet for those seeking reliable dividend growth. The business has lifted the full-year payout at a compound annual growth rate of 12.1% during the past five years alone, and made a huge statement in October by hiking the interim dividend by a colossal 15%.

And with BT’s enviable growth story expected to keep rolling — growth of 4% and 5% is pencilled in for the years concluding March 2015 and 2016 respectively — the City’s army of analysts expect dividends to continue ticking higher.

Current forecasts indicate an 16% lift in the full-year payment this year, to 12.6p per share. And an extra 14% increase is expected in fiscal 2016, to 14.4p. Consequently, BT sports hearty yields of 3.2% and 3.6% for these years.

… but can the balance sheet support these forecasts?

Still, the vast amounts of capital BT needs to take the fight to Sky and become Britain’s foremost multi-services provider puts these forecasts in severe jeopardy, in my opinion. Speculation is doing the rounds that the deal for EE takeover may have to be funded via a rights issue, not a surprise given that the company’s net debt pile stood at more than £7bn as of the end of October.

As well, BT’s colossal pension deficit also threatens to hobble dividend payments in the coming years. The shortfall is expected to clock in above £8bn as of the end of 2014, and brokers expect the firm to have to chuck hundreds of millions at the problem every year for the foreeable future to soothe the issue.

With the business also forking out vast sums for organic investment, from stumping up a fortune to furnish its sports channels through to expanding its fibre network across the country, it could be argued that BT is financially spreading itself too thin. Against this backdrop, I believe that investors could see current dividend projections fall short.

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Royston Wild 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.