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What could suspending its dividend mean for the BT share price?

Earlier this month, BT (LSE: BT.A) announced it would be suspending its dividend for the first time since its privatisation in 1984. I couldn’t help but have mixed feelings about this. As a BT shareholder, its dividend was one of the things that attracted me in the first place.

However, one of the first investing lessons I remember learning is that sometimes cash should be reinvested (or saved) and not redistributed to shareholders. Dividends are great, but not always in the best interest of the company. I am hoping that for BT, this is the case.

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Faster broadband

The saving is being made as the company intends to invest in its full-fibre broadband network. BT intends to connect 20m homes and businesses to the broadband network within a decade. The company is also conscious of maintaining its credit rating – an area that has caused trouble in the past.

Officially, BT said it would suspend its final dividend for the year to March and said there will be no investor payout in the current financial year, expecting to save the company £2.5bn.

Dividends are expected to be reintroduced in the next financial year, but at a much lower 7.7p per share (vs. 15.4p in its previous final dividend). To be fair, this still translates to a healthy 5%–6% yield at its current price. But I do have other concerns.

Pros and cons

In addition to its dividend, a major factor behind my decision to invest in BT was that I felt it was oversold on weaker earnings numbers. I believe it will be able to save decent amounts of money in the coming years as it is able to let go of large amounts of overhead.

However, I am now starting to worry that this may not be enough. One of my own investing rules is to avoid, for the most part, sectors that see large government interference. BT has been an exception to this rule for me. BT is expanding its broadband network in large part due to government pressure. Competition rules means it is forced to share and allow access to its network to rivals.

BT Openreach

One saving grace that has me holding on to my BT stock is that the company is apparently in talks to sell off its Openreach division – its most profitable arm. Openreach, a separate entity within BT, could be expected to raise decent levels of cash for the company.

Hopefully this will bring about a nice bounce in the share price. Personally, it is that kind of jump that I will probably be on the look for as a selling opportunity.

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Karl has shares in BT. 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.