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Forget the BT share price! 4 reasons I’d avoid the FTSE 100 stock and its 8.5% dividend yields

Investors in BT Group (LSE: BT-A) haven’t had much to celebrate of late, but a chunky price uptick more recently has looked promising. The stock has risen 10% during the past month and has broken out of the downtrend that has seen it shrink by more than a third in value since the start of 2019.

I have major doubts, however, as to whether the FTSE 100 telecom can keep this run going. Here are four things that could put it on the back foot again.

Competitive pressures

I believe the  fierce rivalry among the UK’s multi-play service providers is set to keep a lid on profits at BT’s core consumer division. Revenues here dropped 1% in the three months to June, while EBITDA dropped 5%. It’s difficult to see how the bottom line can bounce back when major rivals like Sky, TalkTalk, and Virgin Media continue to slash prices.

But BT doesn’t only face a fight on the price front. Sky has pulled more tanks onto its competitors’ lawns in recent weeks by announcing plans to enter the ‘ultrafast’ broadband market in the not-too-distant future.

Renationalisation on the cards?

A key goal of the Labour Party under Jeremy Corbyn is renationalising the country’s utilities.

Blue chips like electricity suppliers Centrica and water companies like United Utilities are considered the biggest targets, but they might not be the only ones in the crosshairs. Indeed, some chatter emerged last year suggesting that BT could be brought back under government control following draft plans drawn up by the Communication Workers Union.

With the possibility of a general election just around the corner, that is something investors need to keep in mind.

A slowing UK economy

The intense competition that’s plaguing BT’s consumer division is also playing havoc with trade at its enterprise unit.

Sales and earnings there also reversed in the three months to June (by 5% and 3% respectively), though weakness at the firm’s business-focussed division is being exacerbated by the broader struggles in the UK economy. With Brexit uncertainty seemingly here for much longer, it’s unlikely that conditions at the enterprise division will pick up any time soon.

Will capex prompt a dividend cut?

The huge amounts BT is having to cough up to maintain and expand its services is placing huge stress on the company’s balance sheet. And things threaten to get much worse. To give you an example, the boffins at UBS speculate that BT may have to add up to £400m to its annual capital expenditures bill if it is to have any chance of reaching its goal of rolling fibre out to 15m homes by 2025. Something has to give, surely?

With sales drying up, restructuring costs mounting, and hefty pension payments continuing, it’s looking possible there may be a bigger payout cut than the City consensus suggests (to 15.1p per share in fiscal 2020, from 15.4p in recent years).

This is why I’m happy to ignore BT’s gigantic 8.5% dividend yield; in my opinion there are many better dividend shares to buy today, than the battered telecoms titan.

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Royston Wild 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.