The departure of a chief executive rarely reflects well on the direction of a company. It was announced in June that BT (LSE: BT-A) chief executive Gavin Patterson would be stepping away from the FTSE 100 communications colossus later this year, drawing to a close his 14-year association with the business, of which he spent around half a decade at the top of the tree.
The board said that while it was “fully supportive” of the turnaround strategy laid out by Patterson, which includes the facilitation of product revamps and swathes of cost-cutting, it stressed that the muted market reaction to results back then suggested “a need for a change of leadership to deliver this strategy.”
Plenty of problems
Some would view the chief executive’s upcoming departure as a cruel end to his tenure. Sure, the vast amounts of capital BT was spending to secure top-class sports rights to take on the might of Sky may have been a step too far, in retrospect. But the takeover of mobile operator EE could be viewed of something of a masterstroke.
It’s quite clear that BT has needed to do something drastic to stop the revenues rot and help transform its battered balance sheet, but can jettisoning the man at the top really turn around its fortunes?
I’m certainly not convinced. The new person to take over — possibly former Ofcom chief Lord Carter, if recent media reports are to be believed — will have his (or maybe her) work cut out to try and turn around BT’s ailing enterprise operations. The CEO’s job will be all that harder now that the firm’s consumer division is starting to suffer with sales growth decelerating further in recent months.
And conditions are unlikely to get any easier as economic conditions in the UK worsen and competition between Sky, TalkTalk and the rest of the UK’s multi-play service providers intensifies.
Is the dividend about to drop?
Reflecting these troubles, the City expects BT to remain in a state of earnings contraction for some time yet, with a 5% reversal predicted for the year to March 2019 (and a 2% decline for fiscal 2020).
On the plus side, the number crunchers are predicting that BT will keep the dividend at 15.4p per share for a third consecutive year, meaning that investors can drink in a bulky 7% yield. They are estimating that the dividend will fall to 15p in the next fiscal period, however, illustrating the company’s poor earnings outlook and its pressured balance sheet (its net debt ballooned to £11.2bn as of June).
I reckon that these issues mean a dividend cut is likely sooner rather than later, though, particularly as the anticipated payout for this year is covered just 1.7 times by earnings, outside the accepted security benchmark of 2 or above.
Now BT may be cheap, the firm sporting a forward P/E ratio of just 8.3 times. But this is a reflection of the stacks of problems the new chief executive will be greeted with when he steps through the door. When you throw the strong possibility of a huge dividend cut into the equation, I think the telecoms giant is a risk too far today. I’d be happy to sell it without delay.
Royston Wild 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.