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Will BT Group be the next FTSE 100 income stock to cut dividends?

Another day, another round of dividend cuts by Britain’s blue-chips. Land Securities and Centrica are among the latest FTSE 100 income stocks to bang the head on shareholder payouts in Tuesday trade.

The biggest story, though, is news that Bunzl — a company that’s raised annual dividends for the past 27 years on the spin — won’t be recommending a final dividend for 2019. This is a firm that even managed to keep yearly payments rising even during the 2008/2009 global economic meltdown.

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Share pickers need to get used to dividends collapsing as corporate profits come under pressure. As United Nations secretary general António Guterres told reporters on Wednesday, the coronavirus crisis “represents a threat to everybody in the world… [and] will bring a recession that probably has no parallel in the recent past.”

Under pressure

I fear BT Group (LSE: BT-A) could be the next FTSE 100 income stock to axe dividends. It’s a company that’s long been tipped as a possible dividend slasher. And the Covid-19 breakout is likely to push it over the edge, at least in this Fool’s opinion.

The telecoms titan continues to be bashed from all sides. Revenues are falling due to intense competition on the consumer side and tough economic conditions for its business operations. The top line dropped another 2% in the three months to December, to £17.2bn.

Fixed-line telecoms are historically seen as safe havens in difficult times like these. But it’s clear BT faces additional turnover trouble because of the coronavirus crisis. Enders Analysis, for example, estimates it faces a £228m revenues hit should sports events at home and abroad remain on lockdown for four months.

BT also pays huge amounts to keep its infrastructure up and running. It also faces an acceleration in capital expenditure costs as its fibre broadband rollout programme ramps up. On top of this, the business is having to keep making enormous contributions to the company’s pension scheme. It set aside an extra £1.3bn for this during the last quarter alone.

Up against it

On the plus side, BT still generates lots and lots of cash. Unfortunately though, its debt mountain continues to grow. Sooner or later, the firm will be forced to take drastic steps to scythe it down. Net debt blew up by an extra £7.2bn between last March and December to finish 2019 at an eye-watering £18.2bn.

BT has managed to resist cutting annual dividends for the past couple of years. It’s paid rewards of 15.4p per share since fiscal 2017, but City analysts reckon a cut is just around the corner. They predict 15.1p per share for the 12 months to March.

I fear a much larger reduction could occur, however. That predicted payout is covered just 1.5 times by anticipated earnings, below the widely-regarded safety watermark of 2 times. It also has those monster financial liabilities to deal with, of course.

For this reason I’m unshaken by BT’s 13% dividend yield. This is a share to be avoided at all costs.

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Royston Wild owns shares of Bunzl. The Motley Fool UK has recommended Landsec. 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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