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Does the low BT share price and sky-high 8% yield make it bargain of the year?

You need nerves of steel to invest in BT Group (LSE: BT-A), which is down 52% over three years. This is one falling knife that has carried on falling, with the stock dropping another 8% in the past three months to dish out further punishment to bargain hunters.

Development play

Yet it also looks hugely buyable as it yields 8.27% and trades at a bargain valuation of 6.6 times earnings, well below the FTSE 100 average of 15.91 times earnings.

These are compelling figures, but there are dangers, as there are with every stock, including St. Modwen Properties (LSE: SMP), which specialises in regenerating brownfield and urban sites. In contrast to BT, its share price has climbed 26% over the past couple of years, although with a fair share of volatility.

Dividend hike

St. Modwen is up around 2.5% today after publishing its final results for the year to 30 November 2018. These showed a 4.3% rise in its full-year net asset value per share to 470.4p, although profits came in flat at £60.5m.

However, it pleased investors by lifting its total dividend 13.1% to 7.1p a share, while CEO Mark Allan hailed another positive year despite UK economic uncertainties. It made £529m of disposals as it aims to reduce company borrowings and focus its portfolio on sectors with the best structural growth prospects.

Marginal return

St. Modwen also increased house-building volumes and is now “well placed to deliver a meaningful improvement in our return on capital and earnings in the coming years,” Allan said. The £917m FTSE 250-listed company has a modest price-to-book value of just 0.9, only slightly higher than when I last examined it 18 months ago. Operating margins are decent at 22.8%. But with a return on capital employed (ROCE) of just 6%, and a yield of 1.52%, I can’t get too excited right now.

BT is certainly exciting, if not always in a good way, but as Roland Head points out, there are early signs that outgoing chief executive Gavin Patterson’s turnaround plan may be showing some positive results.

Telecoms trouble

There are a lot of FTSE 100 stocks in the same position as BT right now, although not quite as extreme, thankfully. Earnings growth is slowing as the economy and consumers retrench. It operates in competitive markets, with minimal customer loyalty and massive focus on price. Attempts to diversify, such as BT’s move to pinch Premier League broadcast rights from Sky, can be a dangerous distraction.

BT has the added worry of debt, currently £11.1bn, and still has to plug a £4.5bn pension deficit. So there are good reasons why it’s so cheap, especially with revenues forecast to fall 2.7%, and earnings per share by 5.2%.

BT or not BT?

This is a big and complex company in a mature industry and it’s very hard to get a grip on whether its separate divisions are really going to deliver. Many fear the dividend is at risk although cover is currently 1.8, so it may be safe a little while longer. BT remains risky but potentially highly rewarding, especially at today’s low, low price.

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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.