The shares have still plunged by 38% in the past five years, but there are at least three reasons why I think 2019 could see a sustained recovery.
One of BT’s biggest failures in recent years was to pay too much for sports content, handing over money that it really could not afford for rights that it ended up not trying to renew. It looked like a bit of a coup at the time, but it’s a tough strategy to maintain even for a cash-rich company, and BT is far from fitting that description.
At the halfway point this year, net debt stood at £11.9bn, and that’s not a good position from which to be venturing out into high-cost business.
But with a new chief executive in the person of Philip Jansen set to replace Gavin Patterson, BT is refocusing on its core strengths, and that’s the provision of telecoms services.
One possible downside of having a new boss, is that such a transition is often the time when a company can make difficult changes without the old boss losing face. And the risk I see here is of a possible dividend cut.
But I think a company with huge debt paying big dividends while struggling to save costs is madness, and that forecast yields of around 6.5% are unnecessarily high. A cut could seriously help its long-term plans.
Part of its refocus, announced back in May 2018 but only just starting to show through, is a cash cost reduction target of £1.5bn by year three of its new plan. Part of that will (sadly, but necessarily) involve the loss of around 13,000 jobs — mostly in back office and middle management roles.
Cash will also be spent more in line with BT’s core business, with around 6,000 new hires planned in its network deployment and customer service segments.
We’re still in very early days, but in 2018 the company reported a 2% rise in adjusted EBITDA despite a 1% fall in adjusted revenue, which it put partly down to “restructuring-related cost savings.”
The firm is expecting full-year EBITDA to be in the upper half of its £7.3bn to £7.4bn range, and there will be close attention to the results which should be out in May. If the figures can equal or beat expectations, I could see an upturn in the price.
BT’s trend of EPS growth has reversed of late and we’ve seen two years of falls, which is not really surprisingly after the company overstretched itself on the financial front.
What might put off some investors is continuing weak forecasts — a 6% drop predicted for the current year, followed by a further 1% for the year to March 2020.
But there’s always a lead time after the introduction of a new strategy and before we see things start to change at the bottom line. And I’m quite happy to not expect any EPS uptick just yet.
While we’re waiting, the shares are on a forward P/E of only around nine. I see that as undervalued, even if there is a dividend cut.
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Alan Oscroft 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.