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Why I think the BT share price will head higher in the next 12 months

Earlier this month, BT Group  (LSE: BT-A) Chairman Jan du Plessis said that at some point in the next few years, he may consider cutting the company’s dividend in order to help fund the expansion of its UK broadband network.

I admit that this was a bitter pill to swallow – one of the things I like about BT stock is the strong dividend yield, which I feel is a product of the shares being undervalued rather than the dividend being overly generous. But as with all medicine, this is for our own good. It seems to be yet another indication that BT management ia willing to do what it takes for the long-term growth and strength of the company.

Setting up broadband

The potential need for this funding comes as part of CEO Philip Jansen’s effort to bring the company back to growth, most notably through investment and expansion via the UK broadband network. The company has already pledged to connect 4m homes to full-fibre broadband by 2021, and has indicated that it will need an additional £400m-£600m to reach its 15m target, if it can be agreed with regulator Ofcom.

The firm has announced the sale of its central London office for £210m and has said it will also consider funding its big project through other cost-cutting measures, most notably by cutting staff. Slightly more worrying, Plessis did say it would consider borrowing more if needed, which given BT’s history of high debt levels, I think should perhaps be a last resort.

Buy and hold

With this willingness of management to do what it takes to turn the company around, I think the first signs of its efforts working will likely be seen in the next 12-24 months. Some of the more immediate cost-cutting efforts will start to show through in the quarterly reports as 2019 moves into 2020, just in time, I suspect, for its mobile arm, EE, to start making headlines as 5G starts moving into the mainstream (an area where BT is already ahead of most of its rivals).

What’s more, though the firm has said it may eventually reduce dividends, it has committed to maintaining its payout for 2019 and 2020, meaning the current yield is about 8.2%. It is also worth noting that the future dividend cut is only a possibility, not a guarantee (though I do think it likely to happen).

This combination of high dividends and potential long-term growth strategies, I think, makes BT a prime buy-and-hold target right now. The shares are cheap, trading at about 7.7 times forecast earnings, but it is still early days for management’s strategies to be reflected in the financial reports (and therefore reflected in its price).

Effectively an investment at this point is trusting that these strategies will work, but attempting to buy before it becomes so obvious to everyone that the shares have increased in value.

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Karl owns shares of 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.