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BT shares look cheap. I think there are better FTSE 100 stocks to buy though

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Like many other FTSE 100 shares, BT‘s (LSE: BT.A) have been crushed recently on the back of coronavirus uncertainty. Over the last month, its share price has declined from around 155p to 117p – a fall of roughly 25%. That’s the lowest level they’ve traded at since 2010.

At 117p, BT shares look very cheap. With analysts forecasting earnings per share of 23.4p for the year ending 31 March, BT’s forward-looking P/E ratio is just 5. Its trailing dividend yield is 13%. 

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That said, I’m still not tempted to buy BT shares for my own portfolio. Here, I’ll explain why I think there are better FTSE 100 stocks to buy at the moment.

A low-quality stock

The first thing that concerns me about BT is its huge debt pile. At 31 December, net debt stood at a whopping £18.2bn. By contrast, total equity on the balance sheet at 30 September was £10.3bn.

I see this as a problem, as highly-leveraged companies tend to be more vulnerable during economic downturns. With the coronavirus threatening to derail global economic growth, I don’t think it’s the right time to be investing in a business with a weak balance sheet.

My next concern is in relation to BT’s dividend. As I’ve said for a while now, I think there’s a good chance it will be cut in the near future, due to the company’s large debt pile and pension deficit. It appears City analysts agree with me.

The consensus dividend forecasts for this financial year and next are 15.1p and 10.8p per share, lower than last year’s payout of 15.4p. I’d much rather buy a stock with healthy dividend growth prospects.

Finally, recent results suggest BT is still struggling to generate any growth. For example, third-quarter results in late January showed a 2% drop in revenue for the nine months to 31 December.

That was down to ongoing headwinds from regulation, competition, and legacy product declines, along with a 3% decline in adjusted EBITDA. I believe this lack of growth is likely to hamper share price growth in the near term.

All things considered, I see BT Group as a low-quality stock. I think investors can do much better elsewhere.

Better buys

So, what are some FTSE 100 stocks I’d buy over BT Group? Well, one I continue to hold in high regard (and bought more of for my own portfolio earlier this week) is Legal & General.

It also trades at a rock-bottom valuation and offers a big yield (8.5%), yet appears to have much more momentum than BT. For example, the company recently reported a 16% jump in earnings per share for 2019. it also lifted its dividend by 7% – the 10th consecutive increase.

Other FTSE 100 stocks I like the look of right now include Sage, JD Sports Fashion, and Rightmove. These companies may not be as cheap as BT, yet all three have attractive growth prospects and strong balance sheets, which leads me to believe they should be good investments over the long term.

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Edward Sheldon owns shares in Legal & General Group, Sage, Rightmove, and JD Sports Fashion. The Motley Fool UK has recommended Rightmove and Sage Group. 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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