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BT share price challenges: Cancelled dividends and a £31bn merger 

FTSE 100 company BT (LSE:BT-A) has had a volatile time recently and yesterday its share price took a plunge. This was in reaction to the company’s much-speculated pledge to cancel its dividend and plough billions into ramping up its fibre investment. Meanwhile, two significant competitors announced a merger to challenge the UK telecoms market. Telefonica, the owner of O2, and Liberty Global, the owner of Virgin Media, agreed to a £31bn merger. The BT share price was down 7% on the news.

Mounting competition amid increasing costs

The O2/Virgin Media merger is unexpected and poses a threat to BT’s monopoly in the UK consumer market.

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The merger will create one of the UK’s largest entertainment and telecoms firms. O2 has approximately 34m users and Virgin has around 6m broadband and cable TV customers plus 3m mobile users. 

This merger should see its customers benefit from a wider range of services. But, what does this mean for BT’s shareholders and is BT still a share worth investing in? 

Billions and billions of pounds

BT reported a 12% fall in pre-tax profits to £2.3bn for the year ending March 2020. This was partly blamed on a £95m charge caused by the Covid-19 crisis.

In response, the FTSE 100 business suspended its £1bn final dividend for last year along with an estimated £1.5bn in dividends for 2020–21. This is to free up money to forge ahead with its modernisation plans. The savings will form part of the £12bn investment necessary to fast-track its roll-out of full-fibre broadband to 20m UK homes by the end of the year.

BT is a highly indebted company with a 65% debt ratio. Its cost-cutting measures should help it meet its target, but £12bn is a vast amount of money to spend on something that faces mounting competition. 

Cyber security

I’ve liked BT for a while, not so much for its telecoms, but its cybersecurity division. This is an area of increasing demand globally. I think the pandemic will have reinforced this, particularly as so many businesses have their employees working from remote locations, with much less control over their data, online safety, and security.

However, is it a lucrative enough part of BT to warrant continued enthusiasm?

Protecting the UK’s Critical National Infrastructure is of increasing importance. Four years ago, the World Economic Forum estimated the cyber-crime cost to the international economy was at least $445bn. Now it is expected to cost the global economy over £4.2trn in the next four years.

As economic competition becomes increasingly global the cyber market expands with it. Meaning BT will be up against increasing competition in this arena.

Is the BT share price a long-term buy?

When choosing cheap shares to buy in a market crash, it’s important that investors consider the company’s debt and ability to grow. Having considered the monumental amount of spending BT has pledged to do in the coming months, I no longer feel bullish on this share. The BT share price is down nearly 75% in the past five years. Unfortunately, it doesn’t look set to recover soon. It will face rising pressures both internally and externally with many hurdles to cross and regulatory burdens to contend with. With no dividend to sweeten the deal, it’s just another risky share with little to offer shareholders. 

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Kirsteen has no position in any of the shares mentioned. 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.