The Motley Fool

Forget BT! I think this alternative investment has much better prospects

I last wrote about telecommunications firm BT Group (LSE: BT.A) around a month ago in an article with the headline: “Why I think the BT share price could go to £1.”

At the time, the share price stood at 208p, but has since continued its long-established down-trend and the shares now change hands at close to 189p, as I write. So it’s getting there, and I reckon shareholders need just a little more patience before it touches £1!

Sign up for FREE issues of The Motley Fool Collective. Do you want straightforward views on what’s happening with the stock market, direct to your inbox? Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio. Click here to get started now — it’s FREE!

A poor trading record

But it isn’t just because the stock has been going down that I stuck my neck out to attempt a price prediction. There are sound reasons for the collapsing share price. For a start, I reckon the dividend is a good candidate for an axing down the line.

BT’s five-year record reveals that cash flow per share has been falling, earnings have been slipping, and borrowings have been on the rise. Consequently, the dividend has remained mired in the mud. Progression? Forget it!

On top of that, BT is up to its metaphorical eyeballs in debt. Net borrowings stand close to £12bn, which works out at just under four times the level of last year’s operating profit. Then there’s a big pension deficit to fret about too.

Big debts can be excusable with vibrant, growing businesses – arguably, the borrowings help to enable the growth. But BT gives the impression of being a lumbering giant past its best.

Looking forward, City analysts following the firm don’t offer investors any cheer with their predictions of a further double-digit percentage decline in earnings for the current trading year and a modest two-or-three per cent uptick the year after that. Taken together and averaged, we are looking at earnings being well down for the next couple of years.

Cyclical threat

And we haven’t even had a decent general economic slump lately. Imagine the carnage one of those could inflict on BT’s business right now, or perhaps in a year or so’s time. BT should be flying, stock-piling incoming cash flow so it has the resources to get it through the lean times. But it isn’t. Overall, I think the enterprise and the stock look vulnerable, so I’m avoiding it.

Instead of BT, I see a better opportunity in an FTSE 100 tracker fund such as the Legal & General UK 100 Index Trust. The great thing about this tracker fund is that it gives you instant diversification across sectors and between around 100 underlying companies and their businesses. So you can wave goodbye to all the individual-company risk that comes with backing a single horse such as BT.

It pays to shop around because there are many FTSE 100 tracker funds to choose from, and by several different suppliers. But they all give you low-cost access to the market, and you can choose whether to reinvest the dividend income you’ll receive (accumulation version) or to have it paid to you (income version).

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.

Kevin Godbold has no position in any 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.