A well-known name such as BT Group (LSE: BT.A) is bound to get a lot of attention from investors, especially when its valuation looks low, such as right now.
Since the stock’s plunge from just below 500p in November 2015 to around 227p today, the P/E rating has shrunk to around eight and the dividend yield has shot up to almost 7%. Cracking value, you might think, but there’s a problem.
The big earnings slide
BT never did shoot the lights out with growth, but earnings used to increase moderately each year giving investors the confidence that operations were on the right track. That all stopped with the trading year that ended in March 2017. That year, earnings dipped by around 9% and they’ve been falling ever since.
Falling earnings don’t mix well with the firm’s big debt pile and pension obligations. It looks like investors have lost confidence in its ability to prosper, hence the sell-off. But will a low valuation protect us if we dip a toe into the water with BT share now? I have an answer for that. No! I don’t believe a low valuation ever does much to protect investors from losses if a company is in trouble. Share prices don’t care about valuation, they just do their thing, which means BT stock could trade lower from here if things don’t turn around.
The directors are working hard to restructure and turn the business around, of course, and said at the end of July that initiatives to transform the operating model are “on track.” But that hasn’t yet stopped the attrition in earnings. City analysts following the firm expect normalised earnings per share to decline around 12% for the trading year to March 2019 and almost 2% the year after that.
Perhaps now is a good time to pile into BT. After all, famous investor Warren Buffett once said that “you pay a high price for a cheery consensus,” which implies the best time to buy stocks is when the outlook is a little murky and the price is low. But I’m not enthused with BT and think that a better bet might be to invest in a FTSE 100 tracking fund.
Diluting risk and compounding gains
One of the great advantages of a FTSE 100 tracker fund is that it dilutes the risk from any single company. If I invest in BT and the share price halves from here, I’ve lost half my money. But if I invest in a tracker fund, I’ll still have some exposure to BT’s upside potential and its dividend payments because BT is one of the firms in the index.
I’m long-term bullish on the FTSE 100 and believe it could make a great investment from here. But even if it pulls back at times, a regular investment will ensure that the process of pound/cost averaging keeps your money compounding over time because, historically, the Footsie has always bounced back from its lows. However, sometimes individual shares don’t bounce back, so why take the risk with BT today when the FTSE 100 could serve you better?
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Kevin Godbold has no position in any of the shares mentioned. 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.