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Why I’d sell BT Group plc after disappointing first-half results

The first-half results released on Thursday by BT (LSE: BT.A) were not particularly well received by investors. The company’s share price declined by 2.5%, accordingly. This is not particularly surprising, since the update showed a decline in sales and profitability.

Looking ahead, the company may face more challenges. Despite a relatively low valuation and some dividend appeal, it could be a stock to avoid at the present time.

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Disappointing performance

In the first half of the year, BT reported a fall in underlying revenue of 1.5%. This contributed to a deterioration in its profitability, with EBITDA (earnings before interest, tax, depreciation and amortisation) falling 4%. Its profitability was also negatively affected by further investment in sports rights and the customer experience.

While such costs may yield higher returns for the business in the long run, they appear to be eating away at its bottom line. In the case of sports rights, there’s a danger that the company may end up spending heavily in return for lower levels of customer loyalty and less profitability than has thus far been expected. Certainly, seeking to improve the customer experience could help to increase customer numbers and boost retention rates. However, with the company struggling to post positive top and bottom line growth, such investment may be a risky strategy to follow.

The company’s profitability was also negatively impacted by higher pension costs, as well as a decline in its Global Services division’s performance. In terms of the latter, robust actions are being taken to improve its performance. However, such changes could take time to have a clear impact on its overall performance.

Potential improvements?

Despite a tough H1, BT is making progress with its restructuring strategy. It expects the integration and restructuring programme being followed to provide run-rate savings of £250m and £150m, respectively, by the end of the year. This could help to alleviate some of the pressure on the company’s bottom line, although it is still expected to post a decline in earnings of 6% in the current financial year.

Thursday’s results also included details of a change to dividend policy. The company will now pay 30% of the prior year’s full-year dividend as an interim dividend, although the change will not apply to the current year. With the stock currently yielding 6.2%, it may have income appeal at first glance. But with falling profitability and a very uncertain future, there may be better risk/reward opportunities available elsewhere for income investors.

Looking ahead

Clearly, BT is experiencing a difficult period and its price-to-earnings (P/E) ratio of 9.4 may suggest it has value appeal due to a wide margin of safety. However, with the disappointing performance set to continue over the short run, its share price may fall further after the 30% decline in the last year. As such, it appears to be a stock to sell at the present time.

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Peter Stephens does not own shares in BT. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.