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Are BT shares worth buying after the dividend cut?

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Shares in BT Group (LSE:BT) will not pay any more dividends for 2019–20. Dividends have been cut to zero for 2020–21 and will return in 2021–22, but reduced by approximately 50% to 7.7p per share. Other telecoms companies had already reduced their dividends because of the coronavirus crisis, and BT is embarking on massive infrastructure spending, so I was expecting a cut, but nothing like this. 

The market was also shocked at the dividend suspension as after the announcement, BT’s share price fell by 13% before recovering slightly.

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Cutting dividends now

It might be rash to blame the share price fall entirely on the dividend cut since BT also reported fourth-quarter and year-end (31 March 2020) results today. BT identifies regulatory changes, flagging interest in legacy products, trends towards SIM-only plans, and strategic divestments as the culprits behind a 2% year-on-year decline in revenues.

Profits for 2020 fell 16% year-on-year. A £95m provision for coronavirus-related bad debts cannot explain the drop in full, but serves as a reminder of how widespread the pandemics effects are being felt.

Today also saw O2 and Virgin Media agree to merge. If approved, this heavily leveraged merger, which will provide O2’s owner with much-needed cash, will reshape the UK telecoms market.

Yet, 2020 results were essentially in line with expectations and should have been in the share price already. BT’s CEO thinks the merger of two important customers is good news. It, therefore, looks like the slump in BT’s share price was mainly due to the dividend suspension. A zero dividend yield for at least two years might have induced income investors to dump the shares.

Investing for the future

I have not sold my shares in BT. I am not happy about getting no dividends for at least two years, but I do agree with the rationale behind the suspension.

The coronavirus pandemic hit as BT was completing the first stage, which cost £1.6bn, of a transformation. BT now plans to make the largest communications infrastructure investment in the UK in a generation. Upgrading its fibre network alone will cost £12bn. BT is likely to face defaults on customer debt and declining revenues as a result of the viral outbreak, as it is engaging in massive capital expenditure.

The dividend suspension could keep up to £2.5bn in the business, and help to preserve the company’s balance sheet. Now, investors may argue that BT could have slashed its capital spending plans and maintained its dividends instead.

If a business can’t find attractive projects to invest in, then returning cash to shareholders makes sense. However, BT’s investment plans do look set to increase shareholder value. I am happy with a business keeping my dividends back to invest in projects that will return more cash in the future and drive the stock price and potential dividend payments higher.

BT’s plans to unlock the value of its UK consumer base excited me in late April, and they still do now. I would rather they completed the plans, and if that means withholding dividends to preserve the balance sheet then so be it.

If an investor wants dividends for the next couple of years, then they should obviously not buy shares in BT. For those willing to wait and see if BT can pull off its transformation, I think the long term rewards could be high.

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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.

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