The BT share price is down, so should you snap up its 10% dividend yield?

BT Group (LON: BT.A) shares are down 65% in five years. They’re surely set for an upturn, aren’t they?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I reckon we’re in strange times for the FTSE 100 when BT Group (LSE: BT.A) is offering dividend yields as high as 10%. If you’re looking for income from your investments, you might think that’s one to snap up quick. If you invest £1,000 in a stock with an annual yield of 10%, in five years you’ll have £1,600. And in 10, your pot will have reached £2,600. 

So you might expect investors to be buying the shares, which would push the price back up. And that would reduce the dividend yield to around the long-term average.

But exactly the opposite is happening. Investors, rather than snagging themselves an income steam of 10% per year, have instead been on a selling spree. BT shares have slumped 33% over the past 12 months, and by 65% in five years.

No confidence

The obvious conclusion is that the markets have little confidence in BT’s high dividends, and a look at forecasts confirms that. Analysts are expecting 15.4p per share for the current year, the same as it’s been for the previous three years after the telecoms giant hiked it to that level in 2017. But they’re predicting a fall to around 11p per share next year, for a cut of nearly 30%.

In that, BT is echoing what’s happened to Vodafone before it. For years, Vodafone was offering high yields that weren’t even covered by earnings, and the share price suffered similarly. The company bowed to the inevitable in 2019 and slashed the dividend by 40%. Some people, including me, still think that’s too high and expect further pain for Vodafone shareholders.

I think the same is true of BT. The predicted 11p dividend for next year would give shareholders a yield of 7.2%, and that’s still a terrific annual income. It would, after all, still be enough to double that £1,000 investment in 10 years.

Further pain?

Again, we can only assume investors fear further dividend cuts in the years ahead. I share those fears, and I have to ask two questions. Firstly, why is the BT dividend under pressure?

It’s in a very competitive and developing high-tech market and it needs to invest billions to keep up with technology. BT recorded capital expenditure in the first half of the year of approximately £1.9bn, which suggests £3.8bn per year. Against that, dividends are costing the firm around £1bn per year.

If there’s enough cash to afford that, fine. But at the Q3 stage at 31 December, BT’s net debt stood at a staggering £18.2bn. That’s 64% worse than a year ago, although some of the increase is due to the move to IFRS 16 accounting standards. And BT is still stumping up pension fund deficit payments too.

Buying debt

To put BT’s debt into some kind of perspective, it represents 120% of the company’s entire market capitalisation. So if you buy BT shares, you’re buying more debt than company.

Now to my second question. Why do companies pay such big dividends when they’re shouldering massive debts and really can’t afford them? After scratching my head many times over what I see as inadequate capital management, I still can’t work out a convincing justification. When I see such a dividend/debt situation, I walk away and look elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »