Telecoms giant BT Group (LSE: BT-A) has been one of the fastest and sharpest falling knives on the UK stock market in recent years. It’s lost two thirds of its value in four years, hitting a low of 161p in August.
Back on track
There are now signs of a revival, with the BT share price up 13% over the past month, and a further 2% today, following publication of its results for the half year to 30 September. Despite a 1% drop in reported revenue to £11.47bn, CEO Philip Jansen said the results were “in line with our expectations for the second quarter and first half of the year, and we remain on track to meet our outlook for the full year.”
I’m relieved to see investor sentiment picking up because, on 29 August, I stuck my neck out and said BT was now a buy, albeit a risky one. Since that day, the stock has jumped almost 25%, from 164p to 206p. Let’s hope someone out there was paying attention to me. So can BT’s recovery continue?
Revenues down
Today’s small drop in revenues mainly reflected “the impact of regulation, declines in legacy products, and strategically reducing low margin business,” while reported profit before tax was broadly flat at £1.33bn.
BT has been hit by increased spectrum fees, content costs, and investment in the business to improve its competitive position, although this has been partly offset by cost savings from its “transformation programmes.” Increased capital expenditure, up £225m to £1.88bn, as well as higher interest and tax payments, knocked normalised free cash flow by 38% to £604m.
BT cut its dividend a year ago, but it still trades on a forecast yield of 7.5%, with cover of 1.6. Today, it announced an interim dividend of 4.62p per share, the same as 2018’s interim payout. News it plans to match last year’s total payout of 15.4p a share will come as a relief, especially since the company has to bear the cost of rolling out fibre broadband to 4m premises by March 2021.
Rolling out
Management could invest anything up to £30bn on fibre rollouts and 5G over the next eight years, and the big question is where it will find the money. This could threaten the dividend’s long-term sustainability, especially if profits are squeezed at some point in what’s a highly competitive market.
BT is in expansion mode, launching “a host of new products for consumer and business segments,” while bringing the BT brand to the high street in over 600 EE/BT dual-branded stores. Its 5G network is live in over 20 cities and large towns, with 5G smartphone plans now available on both EE and BT brands.
Three years of falling earnings looks set to continue in the year to 31 March 2020, with a forecast drop of 8%, although analysts are scribbling in a 2% jump in 2021. BT can still be a success story.
The group clearly faces challenges but, on today’s forward valuation of 8.3 times earnings, these look priced in. It’s still risky, but remains a buy for me.
