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Why this isn’t the time to be selling BT Group plc

BT Group (LSE: BT-A) is undoubtedly one of the nation’s favourite shares. The telecommunications giant was one of the first companies to be privatised by Margaret Thatcher’s government in the 1980s, and therefore has a significant following among private investors. Until recently it was perceived as one of the safest shares to buy thanks to its long history, strong brand and multinational presence. But reputation counts for nothing in this fickle world as the last few weeks have proved. Yet I think its shares’ recent poor performance could be overdone.

Italian scandal

Why do I think so? Up until a year ago the FTSE 100 stalwart had been performing remarkably well in my opinion, delivering steady earnings growth every year since 2002, with the exception of 2009 when the world was still reeling from the effects of the global financial crisis. BT’s shares were performing quite well too, climbing to 14-year highs of 500p by the end of 2015.

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Of course, since then, the picture hasn’t looked so strong. Concerns over the group’s pension deficit, and its wrangling with Ofcom over the position of its Openreach infrastructure division have weighed on the shares. This has resulted in the telecoms giant suffering a share price slide that saw its shares drop from 500p to 382.55p in little over a year.

That was the closing price on 23 January. But within 24 hours the group had shed a further 21% of its market value as the company issued a profit warning due to an accounting scandal in its Italian business becoming larger than expected, as well as a gloomier outlook for UK public sector spending.

Worth hanging on

An investigation into accounting practices in the firm’s Italian business had discovered that earnings had been overstated for several years, forcing the group to more than triple its original writedown assessment of £145m to around £530m. BT now expects revenue to remain broadly flat over the medium term, but management remains committed to increasing the dividend by 10% for the next two years. The market has already taken a very dim view of the scandal, with the share price now at three-year lows and just managing to keep its head above 300p.

As I said, I do think the reaction is overdone. Granted, the City is expecting profits to shrink this year, but with the forward P/E ratio at 11 and a return to growth forecast for 2018/19, I think the bad news is already in the price. I certainly don’t think shareholders should panic and ditch their holdings just yet. With an inflated dividend yield now at 5%, it could be worth hanging on for a long-term recovery.

Unmissible income play

Another telecoms firm whose share price has been battered in recent times is BT’s mid-cap rival TalkTalk Telecom (LSE: TALK). In a trading statement last week the FTSE 250 firm revealed that since launching its new fixed low price plans in early October, re-contracting rates in the third quarter had been stronger than expected.

The company remains on track to deliver lower churn rates and positive net additions in the final quarter of the current financial year to March. With double-digit earnings growth forecast for the next three years, and a massive 8.9% dividend yield in prospect, TalkTalk Telecom remains an unmissable income play, I believe.

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Bilaal Mohamed 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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