The average easy access ISA currently pays an income of just 0.88% at a time when top FTSE 100 stocks, such as BT Group (LSE: BT.A), are offering yields of 6.71%. This incredible mismatch offers savers an escape route from today’s low interest rate world, but only if they’re willing to take a few risks.
BT is a company in trouble. Its share price peaked at 499p exactly three years ago today, but the only direction has been down since then. Today, it trades at just 232p, having lost more than half of its value since 27 November 2015. However, it remains a £23bn giant.
Cautious heads warned that BT risked paying over the odds to fund its aggressive bid for Premier League football broadcasting rights, and so it has proved. But nobody anticipated the £530m Italian accounting scandal which wreaked further damage to its share price.
The company is retrenching, recently announcing that it was axing 13,000 jobs over three years and moving out of its central London headquarters in a bid to cut £1.5bn in costs, while warning of lower revenue and profits. Chief executive Gavin Patterson is now stepping down after a turbulent five years. But his showy tenure was not all bad, as he bolstered the company by closing its final salary scheme, drew up a deficit recovery plan, and held onto the Openreach broadband operation as a legally separate subsidiary.
Buying BT is clearly more complex than parking money in a cash Isa. But there’s an exciting opportunity here with the share price trading at a lowly forecast valuation of just nine times earnings, well below the 15 times typically seen as fair value. So how can BT put things right?
Clearing up the question of its whopping £11.3bn pension deficit will undoubtedly help, and it recently agreed a 13-year plan which includes payments of £2.1bn over three years, and a further £2bn to be raised from a bond issue.
It must also tackle its net debt, which recently ballooned from £8.8bn to £11.2bn. And may need to go further than its planned sale of non-core assets and streamlining of its under-performing global services operation, especially since it needs to raise cash to invest in 5G.
BT might need to reconsider its football rights strategy, as subscriber numbers fall and the deal fails to drive broadband sales. It should also look to improve its relationship with regulator Ofgem, and tighten its sprawling operations which span retail, wholesale, consumer, business and enterprise-focused divisions.
That is quite a to-do list for new boss Philip Jansen, currently Worldpay’s CEO. The big danger for investors is that he may start by cutting the dividend to raise cash. Jansen faces a lot of challenges, but he also has a massive opportunity to turn BT around, and 2019 could be brighter. Brave investors who buy now and hold for the long-term should ultimately be rewarded for their bravery and patience. Alternatively, buy after Jansen cuts the dividend (assuming he does).
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harveyj 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.