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BT’s share price and 6.5% yield make it my buy of the decade

If you want your portfolio results to beat the market average, then you have to do something different.

Today, I want to explain why the BT Group (LSE: BT-A) share price looks like a buying opportunity to me at current levels. I’m also going to take a look at a FTSE 250 stock that’s fallen from grace. This business looks very cheap, but the outlook is rather uncertain.

Number crunchers are worried

The BT share price has fallen by more than 50% from its 2015 peak of almost 500p. One of the main reasons for this is the firm’s lack of growth. Even the acquisition of mobile operator EE hasn’t reignited sales growth. Revenue has fallen since 2017, a trend that’s expected to continue this year. As a general rule, if sales are falling, it’s very hard for a company to deliver reliable profit growth.

A second concern is that the group’s financial obligations might force new chief executive Philip Jansen to cut the dividend. Although the group’s net debt of £11.1bn isn’t excessive in itself, it’s more of a concern when added to the group’s £5bn pension deficit and hefty spending commitments.

Why I’ve bought BT

I’ve bought BT shares for my long-term income portfolio. The obvious attraction is the stock’s forecast dividend yield of 6.7%. If the payout isn’t cut, this should provide me with a market-beating cash income.

However, I think there’s a significant risk the payout will be cut, perhaps by one third. This would leave the shares with a yield of about 4.3%, in line with the FTSE 100 average. I’m prepared to accept this risk in exchange for the opportunity to profit from a successful turnaround.

New boss Jansen will issue his first set of results on 9 May. If he’s going to cut the dividend, I’d expect a decision then. We should also find out more about his plans for the firm. I expect a continued focus on cost savings and more cautious spending on sports television, but a surprise change of strategy is possible.

I’ve pencilled that date into my diary. In the meantime, I continue to rate the shares as a buy.

Could this fashion firm unravel?

Fashion/lifestyle retailer Ted Baker (LSE: TED) has a long and successful history of expansion. But the firm’s share price has halved since the start of 2018 amid slowing growth and allegations relating to the conduct of founder Ray Kelvin.

Kelvin denied all allegations of misconduct, but resigned on 4 March. As a result of his departure, the company has decided not to reveal the results of an independent investigation into the allegations against him.

What we do know is that the group’s latest results show underlying pre-tax profit fell by 14.3% to £63m last year, despite a 4.4% rise in sales. This fall in profit margins seems to have been caused by higher levels of discounting in “challenging trading conditions.”

I had assumed that Ted Baker’s mid-market appeal would protect it from the high street meltdown. But now I’m not sure. I’m also concerned about how the company will perform without its founder — Kelvin ran the business for more than 30 years.

The shares look good value on 12 times forecast earnings, with a 4.3% yield. But I’m going to wait until we know more before deciding whether to invest.

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Roland Head owns shares of BT GROUP PLC ORD 5P. The Motley Fool UK has recommended Ted Baker. 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.