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I think it’s worth buying BT shares now

The trailing 12-month dividend yield on shares in BT Group (LSE: BT.A) is around 13%. However, BT shares are only worth about 20% of what they were on January 1, 2016. That yield assumes no cut to dividends, which have remained flat for three years and look likely to be slashed.

Nevertheless, I think BT shares are worth buying. The market is overlooking the company’s potential after years of struggle, and a dividend cut would help finance the turnaround.

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Network issues

BT wrote off £530m of assets after the January 2017 discovery of dodgy accounting in its Italian operations. It also had to pay around £225m to avoid potential litigation from the former owners of EE, the mobile network it bought in January 2016. Although revenue jumped from £19bn in 2016 to £24bn in 2017, the first full accounting year with EE on board, profits fell from £2.5bn to £1.9bn. That had a lot to do with those write-downs and other items.

BT appointed a new CEO in January 2019, who was tasked with returning BT to “national champion” status. Sprucing up high-street stores and returning customer call centres to the UK should help. BT is recruiting an army of tech experts and engineers to advise customers and upgrade networks to full-fibre and 5G.

These plans will cost a lot of money. Analysts are not expecting profits to bounce back any time soon. There have been persistent rumblings of a dividend cut to fund the increased infrastructure investment. BT’s international operations, which are more business-driven, lost money during the financial crisis. They probably will again during the coronavirus crisis. A dividend cut looks likely.

With a dividend cut on the cards and profits flat at best over the next few years at least, BT might sound like a share to avoid. However, with the current share price at 118p and last year’s dividend at 15.4p, a hefty cut would still leave a decent yield. Besides, profits are being sacrificed now to invest in infrastructure, which should benefit the company in the future.

Increasing bandwidth

BT has the UK’s largest fixed-line, broadband, and wireless network, and delivers content through BT Sport, for example. Its scale delivers cost advantages, and there are significant barriers to entry in its industry. 

BT is ahead of mobile competitors in introducing 5G, and its full-fibre plans, if realised, would give it another competitive edge. Openreach, which owns and operates BT’s fixed-line (including fibre) network is no longer under threat of nationalisation. EE took longer than anticipated to integrate into BT because of ongoing reviews by the UK’s telecoms regulator, but that can happen now.

BT has the potential to develop lightning-fast mobile and broadband networks covering a huge chunk of the UK. It can cross-sell and bundle products and offer complete communications service packages to its customers. It can also deliver content to those customers through its networks.

Unlocking the potential of its UK consumer base is what I find most exciting about BT stock. However, BT’s enterprise and global divisions should not be overlooked even as their importance has shrunk. They are now focused on higher-margin products, with some exciting tie-ups with tech giants.

I believe BT will eventually get its message across, which is why I bought it along with some other shares this month. However, I am prepared for a bumpy ride.

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James J. McCombie owns shares in BT group. 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.