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3 powerful reasons to desire BT Group plc right now

Since the plunge in BT Group’s (LSE: BT.A) share price to 302p or so during January, as the news of the firm’s Italian accounting scandal broke, the stock has bounced back around 8% and now trades at 327p as I write.

The rise seems justified by three powerful factors that are likely to be attracting investors to the firm.

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Valuation

It would be hard to argue that the share price overvalues the business right now. The forward price-to-earnings (P/E) ratio for the year to March 2019 sits at almost 11 and the forward dividend yield is just over 5.7%. City analysts following the firm reckon earnings are likely to cover the payout around 1.6 times.

Such a valuation compares favourably with the median forecast of all stocks on the London market with estimates, which is showing a P/E around 14 and a dividend yield just over three. Although averages should be handled with care because individual firms have their own challenges justifying different valuations.

Yet BT’s cash flow remains robust and supports earnings well, which bolsters the case for good value, as you can see from the firm’s trading record:

Year to March 2012 2013 2014 2015 2016 2017(e)
Operating cash flow per share (p) 43.4 64.5 58.3 58.6 59.4 70.2
Normalised earnings per share 22.1 24.6 26.9 31 32.9 31

So far, there’s no sign that the business is struggling financially.

Operational progress

I reckon, with any company, and particularly with a big outfit such as BT, once problems have been unearthed they will be addressed. BT’s Italian accounting scandal will likely be in sharp focus with the directors and management of the company and I think it is safe to assume that the problem will be fixed. As such, I think the problems in Italy, although important, are nothing for investors to worry about too much from here.

Meanwhile, BT continues to make operational progress in other areas. On Monday, we learnt that the firm’s bid for exclusive rights to broadcast the UEFA Champions’ League and the UEFA Europa League for a further three years from the 2018/19 season was successful.

The deal will cost BT around £394m per year and follows the acquisition of mobile operator EE last year, which the firm says more than doubled the company’s marketable customer base.  The directors say that BT is in a strong position to monetise the UEFA league rights investment by means of subscription, wholesale, commercial, and advertising revenues.

Director confidence

I think we can get a good steer on how confident directors are about a firm’s forward prospects by looking at their decisions regarding the dividend. With BT, the news is good because, despite the problems in Italy, the directors didn’t trim the dividend when announcing three-quarter results at the end of January.

In another clue to how confident the directors feel, I’m encouraged to see a few director share purchases going through in February. Overall, I think valuation, operational progress and director confidence are three powerful reasons to desire BT right now.

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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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