It’s been tough to be a BT (LSE: BT.A) shareholder during 2019. Excluding dividends paid to investors, the stock has declined 15% year-to-date, underperforming the FTSE 100 by a double-digit percentage.
However, I think the company is starting to turn the corner and, for that reason, I believe now could be a good time for risk-tolerant investors to start building a position.
Tackling the problem
I’ve noted when I’ve covered the business in the past, for years BT has been putting profit over people. I reckon this is why the company has started to struggle recently.
With competition in the telecommunications sector growing daily, BT can no longer take its market share for granted. The group has to stand out in a crowded field, and it can’t do that with poor customer service.
Management has finally realised BT has been underinvesting and is planning to change that. Over the next few years, the group is expecting to spend hundreds of millions of pounds investing in call centres, new stores and tech teams to help customers around the country. On top of this, billions in extra capital spending is earmarked to upgrade BT’s infrastructure.
Will take time
Unfortunately, it will take some time for these efforts to flow through to the bottom line. In its half-year results, the company reported a 2% decline in revenue and a 3% dip in earnings before interest, tax, depreciation and amortisation. Although overall costs increased by 18%, efforts to streamline the business in some areas helped offset the rising cost of doing business for the firm.
BT believes it would cost £25bn-£30bn to roll-out full-fibre broadband to every home in the UK, which the company cannot afford by itself. Management is hoping for some government support. Still, even then, City analysts believe the business will ultimately have to reduce its dividend to shareholders to meet capital spending promises.
With this being the case, I’m hesitant to recommend BT as an income investment at current levels, even though the stock does currently support a market-beating dividend yield of 7.4%.
Reducing the dividend by 50% would free up an extra £750m per annum for the company to invest back in business.
Overall, I think the stock has a much brighter future as a growth investment. Right now, shares in BT are trading at a depressed 8.5 times forward earnings, which reflects the deflated market sentiment towards the business.
However, if growth returns, I don’t think it’s unreasonable to suggest the stock could return to the sector-average multiple. If this occurs there could be an upside of as much as 35% on offer for investors from current levels.
So, with a potential return of 35% on offer if BT does return to growth, this could be an attractive buy for risk-tolerant investors with a long term investment horizon, who aren’t too concerned about dividends.
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Rupert Hargreaves owns no 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.