If there is a place that income investors should be looking at, it is the FTSE 100. BT (LSE: BT-A), one of its component companies, especially has a dividend investing appeal at a current yield of 8%.
A strong dividend investing appeal
BT needs no introduction. The UK-based company offers services ranging from telephony, home security and internet services. In addition to its firmly established brand, the group has also won an income investing appeal over the years.
However, BT has been having a shocking run for the last five years. From £5 in November 2015, its share price has been consistently falling, presently at around £1.93. Plus, its debt profile has been rising, owing largely to the expensive fibre broadband and 5G investments it has been making.
That might be some good news nevertheless. Because, at its current dividend yield of 8% and a price-to-earnings (P/E) ratio of 8, BT could be holding a lot of room for future return.
Declining revenue for three years
In 2017, BT’s sales were flat. However, since 2018, its annual profit postings have been improving. In fact, the company recorded a marginal increase in its pre-tax profit in 2019.
BT’s sales and profits will continue to rise in a sustainable way. Why? Because its long-term capital investments in ultra-fast internet service and 5G technologies, coupled with improved customer support service, are expected to be its primary drivers of growth in the coming years.
Capital investments to offset declining income in the long term
Operating in an increasingly competitive industry, BT is left with no choice than to be up-to-date if it does not want to be pushed out of the game. To this effect, the firm has been investing heavily in the latest technologies such as full-fibre ultrafast broadband and 5G.
In fact, as of September 2019, BT had connected at least 1.8 million UK homes on its full-fibre broadband. Given that just roughly 8% of the UK population currently has access to ultra-fast broadband, there are still a lot of opportunities for the company to invest in this regard.
While those high-cost investments might momentarily impact the company’s cash flow, they are good costs that it will definitely recoup down the line. Or how else can it reverse the trend of declining revenue that it has been experiencing for the past three years?
Undoubtedly, BT is currently undervalued. While a dividend cut is possible for the 2020/2021 financial year, the company’s dividend payment will be normalised once its long-term capital investments start paying off, and the share price will ultimately improve.
So, even if the management decides to introduce a dividend cut like its peers Vodafone and Deutsche Telekom have done in the past, BT can still make a good albeit risky buy for far-sighted, adventurous bargain investors.
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Pi De Jonge 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.