BT’s (LSE: BT.A) share price continues to underperform the FTSE 100. Year to date, the stock is down around 7% (versus a rise of 7% for the FTSE 100) while over the last three years, the shares are down a massive 50%.
With the stock now trading on a forward P/E ratio of just 8.5 and offering a dividend yield of around 7%, there are likely to be many investors who are tempted to buy BT shares at the current share price and pick up the big dividend yield. However, I’m not convinced that buying BT is a good idea right now. Here’s why.
To my mind, there’s a fair bit of uncertainty in relation to the sustainability of BT’s dividend at the moment. For starters, the group cut its interim dividend slightly in November, which is never a good sign. Secondly, new CEO Philip Jansen – who took over in February – could have his own ideas on how to allocate capital effectively going forward. With the group sitting on a huge pile of debt (not to mention its gigantic pension deficit), I think there’s a chance the new chief exec could decide to reduce the payout to shareholders. As such, if you’re buying BT shares now, I think you need to be prepared for another dividend cut.
Furthermore, the landscape for BT continues to look challenging. For example, in January, the group warned of “aggressive broadband price competition,” while it also said that “trends in the high-end smartphone market continue to be challenging.” Moreover, the group also advised that it faces increased regulatory costs through the next year. As such, analysts expect adjusted earnings per share to fall for a third consecutive year this year.
Overall, the outlook for BT shares remains opaque, in my opinion. I think there are much better stocks out there at present.
A better dividend stock?
One FTSE 100 stock I’m more bullish on is ITV (LSE: ITV). Like BT, it also trades at a rock-bottom valuation (forward P/E of 10) and sports a big dividend yield (6%).
ITV isn’t without its own issues of course. Just recently, CEO Carolyn McCall stated that the economic and political headwinds for the UK will have an effect on the advertising market and that the group remains sensitive to this.
However, the company continues to make strides in growing its Studios division, with revenues from this division growing 6% last year, and its strategic partnership with the BBC to create a new streaming service for UK audiences, BritBox, appears to be another positive development that could drive growth going forward.
ITV recently hiked its full-year dividend by an inflation-beating 3%, taking its payout to 8p per share, and the group also advised that it plans to pay “at least” 8p per share for FY2019. With that in mind, I believe the stock offers more appeal as an income play than BT Group at the moment.
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Edward Sheldon owns shares in ITV. The Motley Fool UK has recommended ITV. 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.