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BT has a high dividend yield of 12.6%. Can it be sustained?

Speculation about a dividend cut from FTSE 100 telecoms provider BT (LSE: BT-A) was doing the rounds even before the stock market crashed. But almost a month into the crash’s official start, BT seems nowhere near announcing a dividend cut. And this is at a time when many other companies have either cut dividends or suspended them completely. 

Even before the FTSE 100 biggies went on a dividend cut drive, BT’s was attractive from a dividend yield standpoint. After the cuts, its allure has only increased. It’s now among the handful of FTSE 100 companies that offer double-digit dividend yields. But the question remains: will it maintain its dividends going forward as well? 

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BT’s confident in tough times

To assess what it’s going to do next, let’s first consider its latest release from a few days ago. CEO, Philip Jansen, said: “Despite unprecedented demand for connectivity, our fixed broadband network and our mobile network are delivering for our customers when they need us most”. Demand increase is a positive for BT’s business. 

The release also said that no one will lose their jobs for at least the next three months. In fact, it has offered a 1.5% annual pay increase to its non-managerial staff. This, in conjunction with its statement on demand, says to me that BT’s doing all right, at least for now. If it was in dire straits, I doubt it would have been as confident in both its speech and actions. 

That said, its existing issues remain. Its financial performance can be better and it’s also a debt ridden company. BT has already said in the past that it could cut dividends to undertake more capital spending. It hasn’t happened so far. But now of all times, it may well take place. 

Long-term dividend history

As an investor in BT, I’d take heart from the fact that it has a long history of dividend payouts. If its business continues to be robust, I see little reason that would change. Even in 2009, when the last global recession happened, BT cut dividends but continued them nevertheless. That in itself is a positive at a time when some FTSE 100 companies are suspending dividends altogether. 

Further, even with a dividend cut, BT may still continue to be a good investment to the extent that its yield stays above the FTSE 100 average. The FTSE 100 average yield is 5%. BT’s dividend yield is a whole 7.6 percentage points higher than this. Can its dividends drop so much that its yield falls below that of the FTSE 100? Going by how sharply it cut its dividend in the last recession, it’s possible. 

The upshot

But that’s only as long as its share price remains static at current levels. BT’s price has been tumbling since 2017 anyway and it continues to do so. I reckon that if it cuts dividends, its share price will fall further, making its dividend yield competitive again. Any way I look at it for now, the income investor could come out ahead by investing in the stock.  

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Manika Premsingh owns shares of BT GROUP PLC ORD 5P. 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.