Why I think the BT share price is the cheapest stock in the FTSE 100

BT Group – class A common stock (LON:BT-A) is deeply undervalued, but does that make the FTSE 100 (INDEXFTSE: UKX) company a buy?

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Whichever way you look at it, the BT (LSE: BT.A) share price seems cheap. At the time of writing, the stock is trading at a forward P/E of just 8.4 and supports a dividend yield of 7%.

According to my research, there are only a few other companies in the FTSE 100 trading at a lower earnings multiple. However, I think the P/E ratio actually understates BT’s value. 

A more appropriate metric to use in my view is the enterprise value to earnings before interest tax depreciation, and amortisation (EV/EBITDA) value. This takes into account the value of all of the group’s assets. 

On this metric, BT is the second-cheapest non-financial and non-resource company in the FTSE 100. Only J Sainsbury is cheaper after the stock slumped more than 20% following the CMA’s decision to advise against its merger with ASDA. The retailer is trading at an EV/EBITDA ratio of 4.2 compared to BT’s 4.9, although I wouldn’t be surprised if Sainsbury’s stock price weakness is short-lived. 

With that being the case, BT looks to me to be the cheapest stock in the FTSE 100 today, but that doesn’t mean I’m interested in buying the telecommunications giant. 

Cheap doesn’t mean good

I think BT shares are cheap for a reason. The company is facing multiple headwinds including increasing competition, rising costs and demands from regulators. It’s having to fend off competition and appease regulators with a stretched balance sheet and falling earnings. It also has a pension deficit that’s bigger than the market capitalisation of most companies listed in the FTSE 100 (at £14bn, it’s the same size as Centrica and Ocado put together). 

Despite efforts by management to try and reignite growth at the business, City analysts are expecting earnings per share to fall over the next two years. A decline of 12% is pencilled in for 2019, and a drop of 2% is predicted for 2020. Analysts expect the dividend to remain stable but, in my opinion, the payout is living on borrowed time.

Costing £1.5bn a year, I think the company could make better use of this cash paying down debt or investing in operations, which would help improve long-term returns for shareholders. For example, for the half-year to the end of September 2018, BT paid out nearly £300m in interest on its debt, implying a total outlay for the full year of £600m, almost half of all BT’s total dividend cost. 

Standing still 

BT strikes me as a company that is standing still and, for this reason, I think the shares deserve a low valuation. So while the company might be one of the cheapest stocks in the FTSE 100, I don’t believe investors should be rushing to snap up the low-priced shares.

Indeed, there are plenty of other companies out there achieving better rates of growth, with stronger balance sheets and aren’t tied down by regulators’ demands. 

Put simply, BT might look cheap and undervalued at first glance, but just because the shares are cheap, that doesn’t mean they are worth buying.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

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