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BT’s share price has fallen below 200p. Here’s why I’m still not buying

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BT shares (LSE: BT.A) have had a rotten run over the last few years. Only a little over three years ago, the shares were changing hands for around 400p. Today, however, BT’s share price is just 192p.

At the current share price, BT does look cheap. Crunching the numbers, the forward-looking P/E ratio here stands at just 8.1, well below the median FTSE 100 P/E of 15. That said, I’m still not tempted to touch the stock. Here are a few reasons why.

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Lack of revenue growth

For starters, BT’s revenue growth has completely stalled. In fact, it’s worse than that – the company’s top line is in decline.

Year Revenue (£m)
FY2017 24,082
FY2018 23,746
FY2019 23,459
FY2020E 23,034
FY2021E 22,925

This trend doesn’t look good. If a company’s revenue is falling, it’s much harder to increase profits and dividends.

Expenditures are increasing

It’s also worth noting that BT faces significant capital expenditures (capex) in the years ahead due to 5G and the full-fibre broadband rollout. It also just agreed to pay another £1.2bn for the Champions League’s rights for the next three years. This could put pressure on free cash flow and profits. Just recently, the group advised in its half-year results that normalised free cash flow for the six months to 30 September fell a huge 38% due to increased capex. The combination of declining revenue and increasing costs is not good.

The dividend looks unsustainable

Lower cash flow could, in turn, put pressure on the dividend. I’ve said for a while now that I believe it’s only a matter of time until we see the payout cut.

Year Dividend per share (p)
FY2017 15.4
FY2018 15.4
FY2019 15.4
FY2020E 15.4
FY2021E 13.3

In my view, it’s a concern that BT has now paid three full-year dividends of 15.4p. When a company stops increasing its dividend, it’s often a sign that a cut is on the horizon. Interestingly, looking at FY2021 forecasts, it appears that a number of analysts expect the payout to be reduced next year.

Weak balance sheet

BT’s balance sheet also looks quite worrying. At 30 September, the group had net debt of £18.3bn on its books as well as a pension deficit of £5.1bn. By contrast, total equity stood at £10.3bn.

Analyst downgrades

I’ll also point out that analysts are still downgrading their earnings forecasts for FY2020 and FY2021. In the last month, the consensus FY2020 earnings forecast has fallen from 24.37p per share to 23.8p per share. That’s a decrease of nearly 2.5%. While analysts are downgrading their earnings estimates, the stock is likely to struggle to generate any positive momentum.

Labour government ‘risk’

Finally, adding further uncertainty to the investment case is the Labour government’s plan to part-nationalise the company if it wins the upcoming election. Right now, the chances of Labour winning the election look remote, however, anything can happen in UK politics at the moment, so the situation shouldn’t be ignored. 

Putting it all together, I don’t see much appeal in BT shares right now. All things considered, I think there are much better stocks to buy today.

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Edward Sheldon has no position in any 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.

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