Stock in telecommunications behemoth BT Group (LSE: BT-A) rocketed in early trading this morning as market participants responded positively to the latest interim numbers from the FTSE 100 firm.
With the share price finally starting to show signs of a sustained rebound, should previously reluctant investors — particularly those focused on generating income from their capital — now think about adding the stock to their portfolios? I think so.
Reported pre-tax profit and adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) came in at £1.34bn and £3.68bn respectively over the first half of BT’s financial year as a result of costs being trimmed and higher volumes of expensive smartphones being sold by its consumer business. The pre-tax profit number was an increase of 24%.
Elsewhere, the company stated that it continued to see improvement in customer experience metrics, an increase in the speed of ultrafast broadband being deployed and “positive progress” in transforming its operating model.
It wasn’t all good news, however. At £11.59bn, reported revenue was 2% lower over the six months to the end of September with BT’s consumer arm impacted by price reductions at Openreach and relatively poor performance at its enterprise business. Free cash flow also fell 22% to £974m, partly as a result of capital expenditure climbing by £140m to £1.83bn.
Having labelled today’s numbers as “encouraging“, outgoing CEO Gavin Patterson reflected in his statement to shareholders that the company was beginning to see the benefits of its strategy to “simplify and strengthen the business and improve efficiency“.
He went on to remark that guidance on the full year hadn’t changed and that, despite growing pressure from rivals, BT still expected EBITDA to be in the “upper half” of the £7.3bn-£7.4bn range.
For some time now, I’ve felt that the market was being too harsh on BT. Almost three years ago, the share price was close to breaching 500p. By May 2018, it had fallen to as low as 203p — a reduction of just under 60%. Even today, the shares still change hands on a fairly cheap price-to-earnings (P/E) ratio of 10.
Despite the fact that BT’s new leader will be paid more than his predecessor (whose remuneration was already a contentious issue among shareholders), I’m also optimistic about the arrival of ex-Worldpay boss Philip Jansen next year. While increased competition and a sizeable pension deficit mean he will still have his work cut out, confirmation that the company will not be spinning off Openreach, despite opposition from activist investors, does remove some uncertainty, at least in the short term.
Arguably BT’s biggest draw, however, remains its dividend. Today, the company announced an interim payout of 4.62p per share or 30% of last year’s total cash return to shareholders (15.4p). That’s a cut of 4.7% from the 4.85p given back to owners in the previous financial year.
That’s not to say that income investors should be unduly worried. Assuming analyst projections are correct, BT is expected to hand back 15p per share in 2018/19. Taking today’s share price move into account, that leaves a yield of around 5.7%. Given that interest rates are unlikely to rise significantly any time soon, that’s certainly not to be sniffed at. Despite the aforementioned fall in free cash flow, payouts will also likely be covered 1.7 times by profits, which is an improvement on last year.
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Paul Summers 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.