One of the first lessons I remember learning about investing was to be aware of companies offering particularly high dividend yields. The truth is that sometimes what is in the best interest of a company is retaining profit for investment, not giving it out to shareholders. What’s worse, a company can often try to entice investors with high yields to bolster its share price, even though the fundamentals of the firm may not warrant it. This is an investment philosophy I have always lived by.
Every so often fears or uncertainty can drive a share price lower, which in turn can create a dividend yield that is above average, even if the firm simply maintains the gross dividend itself. This seems to be the case with telecoms giant BT Group (LSE: BT-A). For the past three years the company has seen its share price more than halve, due mainly to high costs, mismanagement and sliding revenues – but all this may be ready to change.
The company is currently in its first year of a three-year turnaround plan that will have the company’s operating model simplified, see the hiring of more engineers, and thanks to the end of an archaic employment policy held over from its state-owned days (which effectively made it impossible to make redundancies), it will be cutting around 13,000 staff that were probably not needed in the first place.
Going forward, this turnaround plan should hopefully start to show results on both the top and bottom lines, as cost cutting and improved customer service filter through. With 5G technology set to come into play over the next year or two, BT should also see a boost for its EE mobile phone arm, while its move into the sports coverage realm, particularly football, seems to be going smoothly and garnering results – BT’s strong brand recognition giving it a chance to compete against the likes of Sky.
Of course, this potential recovery for its stock is not without its risks, and is very much dependent on the turnaround efforts actually working. BT is in the unfortunate and unique position, having once been state-owned and being so responsible for the telecoms infrastructure in the UK, of coming under greater government scrutiny and even specific regulations that other firms might not – always a concern for investors.
With the company confirming in its full-year results that it will be maintaining its 15.4p per share dividend, yielding over 7% at its current price, it may have indeed been trying to garner investor support for its stock given its declines over the past few years. However, if we give the company some benefit of the doubt, and say the stock is oversold and under-priced at the moment, this same dividend would seem far more muted (a yield of just 5% at BT’s average 2017 price, and just 3.9% at its 2016 levels).
With these kind of returns, now may be the time to take advantage of high dividend yields, and the potential for strong capital gains.
Karl owns shares in BT Group. 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.