The combination of a high dividend and a low P/E ratio is often an enticing proposition for investors. Judged purely on that basis, many might be tempted to add BT (LSE: BT-A) to their portfolios, especially as it has both this combination and a shiny new CEO in place with lots of fresh ideas. The company may now be able to accelerate its turnaround and grow the share price. So does that make the company’s shares worth buying today?
The long answer
Last week, BT made its first announcement under its new chief executive, Philip Jansen, which was most notable for keeping the dividend unchanged. This had been an area of contention apparently among management, and there was a fear among investors that it could be cut in order to give the new chief more breathing space to invest in the full-fibre broadband network. This move would have helped appease regulators who have been breathing down BT’s neck. Instead, for the moment at least, the dividend is safe, which is a relief for anyone investing in BT for income. But time will tell whether it is in the best interests of the company and investors in the long-term.
Also in the final results from the company, there was a mix of positives and negatives as profit before tax was up 2% while revenue was down slightly. A solid performance from the consumer business was offset by weakness in the enterprise segment. For a company as big as BT, the full-year numbers were never going to set pulses racing, but I think these numbers are decent.
The bigger picture
Ignoring the P/E and yield, which are shorter-term considerations, can BT grow as a business? My thinking is that it can. It has the advantage of scale, huge marketing budgets, unique infrastructure access and it taps into several growth industries such as telecoms and sports broadcasting. Even if the company rows back from high spending on sports rights under the new CEO, to concentrate instead on its bread and butter of fixed line communications, I still expect it to grow.
The apparently imminent launch of 5G will lead to higher prices for customers and that in turn should feed into BT’s bottom line. If BT can continue to cross-sell its products (mobile, broadband and content) then that will reduce customer churn and increase the average price its customers pay – both of which will help it increase future profits.
To me, the BT share price is attractive right now. In the short-term, the dividend has been maintained rather than slashed, which is good for keeping investors onside and the shares are priced cheaply with the low P/E. A lot of BT’s potential is in the hands of the regulator, so fixing relationships there will be a priority for the new CEO, but BT also has a lot of control over its future.
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Andy Ross 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.