For the past few years, the BT (LSE: BT.A) share price has been a pretty poor investment to own. The company has been struggling to retain market share in a hostile environment. Regulators, competitors and customers all seem to be blocking the group’s growth.
However, the firm has recently received some good news. The result of the general election back in December removed the threat of nationalisation. Despite this improvement, the share price has plunged this year. Having fallen 20% in just a few weeks, the stock now looks to be one of the cheapest investments in the FTSE 100.
The question is, does the BT share price look like it’s worth buying today?
It’s difficult to understand why the price has fallen in 2020. Most surveys indicate the business environment across the UK has improved dramatically over the past four weeks.
On top of this, the threat of nationalisation has vanished, and the new Tory government is promising to billions will be spent upgrading the country’s infrastructure. So BT should be flying high. Indeed, most of the company’s competitors are doing just that.
It seems investors are worried about BT’s potential spending commitments. Policymakers want companies across the telecoms sector to invest more in upgrading infrastructure. As the sector’s largest infrastructure owner, BT is likely to have a much bigger bill the most.
Management has also declared that the group’s bill for complying with the government’s restrictions on Huawei could cost as much as £500m.
But it’s not all bad news for the business. The UK’s telecoms regulator has suggested it could allow BT to increase the wholesale charge on basic broadband packages by around a quarter. This would allow the company to generate a higher return on its investment if it acts quickly to replace old copper cables with state-of-the-art full-fibre broadband.
This additional expenditure would hit the company’s cash flows. As such, analysts believe the business will have to cut its coveted dividend payout in order to fund growth. At the time of writing, the stock supports a dividend yield of 9.5%.
This might be bad news for income seekers, but for long-term investors, now would be a great time to buy the stock. The market seems to be ignoring the fact more investment today will pay off in the long term.
As such, the stock’s current valuation suggests it offers a wide margin of safety at current levels. The BT share price is currently dealing at a price-to-earnings (P/E) ratio of 7. That’s compared to the telecoms sector average of 11.2.
This suggests the shares are undervalued by around 38% at current levels. Therefore, the stock could generate substantial capital gains for investors who are willing to look past short-term headwinds facing BT.
The company is likely to cut its dividend in the next few years, but even a 50% reduction would leave the stock yielding around 4.5% at current levels. Compared to the FTSE 100 average of 4.3%, this would still be extremely attractive.
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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.