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This is what I’d do about BT’s 8% dividend yield

I can see no reason to buy the BT Group (LSE: BTA) share price. It’s been locked in a down-trend for almost four years, and the recent first-quarter results report revealed good reasons for the slide to continue.

Some might be tempted by the low-looking valuation. After all, the recent share price close to 180p throws up a forward-looking price-to-earnings rating of just over seven for the trading year to March 2021, and the anticipated dividend yield is almost 8% — cheap, cheap, cheap. But that doesn’t translate to buy, buy, buy, as far as I’m concerned.

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Where are the green shoots?

If I’m looking for a turnaround in a company’s share price, I want to see evidence of the stock moving up and establishing a bottom before buying. And I want encouragement from the figures and narrative coming from the enterprise — some evidence operations look set to improve looking ahead. Green shoots, if you will. But I’m not seeing any of that from BT right now.

In the first quarter to 30 June, revenue, EBITDA and normalised free cash flow all slipped a little further down. Meanwhile, net debt crept higher and capital expenditure went up. Perhaps the money BT is ploughing back into operations will deliver growth in the future, but how low will the share price go first? I suspect a lot further than it has plunged already.

Earnings, operational cash flow and the dividend have been trending down for a few years now. And BT has a big load of debt and a large pension deficit. Could things get worse? They certainly could. How about a half-decent general economic slump? BT seems to be in no condition to withstand one of those right now, but it could happen.

A poor-quality stock

Overall, I view this venerable old name and long-time constituent of the FTSE 100 index as a poor-quality stock. To me, there’s a huge amount of downside risk for shareholders with this one, which isn’t balanced by even greater upside potential. I stand by my previous speculation that the share price could fall as low as £1. Indeed, it’s fallen that far before.

So, when it comes to that tempting dividend yield near 8%, I’d ignore it. In fact, I’d even go as far as to chuck BT out of my portfolio if it had been in there. What’s the point in collecting a dividend income from a stock if I’m at risk of giving it all back in capital because of a sliding share price? On top of that, the dividend payment has been slipping recently too.

To me, BT looks cheap, but it’s cheap for very good reasons. Rather than buying shares in firms that are cheap and challenged, I’d rather pay a higher valuation and back a vibrant enterprise with decent growth prospects. There are many companies listed on the London stock market but, at any one time, only a tiny handful are worth buying, in my opinion. And right now, BT isn’t one of them.

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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.