At its current price of around 100p, the BT (LSE: BT-A) share price has not been this low since the Financial Crisis of 2009. In that case, it was able to recover strongly over the next few years. As a result, many believe that it will be able to achieve a similar feat this time round. But with a huge number of problems associated with the company, is it still too risky to buy?
The problems with BT
The BT share price has been falling for years now due to limited growth, a huge amount of debt on the balance sheet and a large pension deficit. For example, the company has over £18bn of debt, despite the fact that its current market capitalisation is just £10bn. This is a very worrying sign, and evidently the company will have pay off debts over the next few years. This may limit the amount of money the company can return to shareholders through dividends and share buybacks.
In fact, the group has already cancelled the dividend, and there is no chance of it returning until 2022. Although this is probably the correct decision long term, as it will allow the firm to invest in improved broadband and a modernisation programme, it does show that the current problems with BT abound.
The BT share price may also be weighed down by the recent government decision to get businesses to remove all Huawei equipment from their infrastructure over the next few years. Consequently, BT will have to incur extra costs over that timeframe. There is also likely to be a two-year delay in a wider 5G rollout.
Is the BT share price undervalued?
Despite these problems, the BT share price does look very cheap at the moment. For example, over the weekend, Sky reported that BT is preparing to defend itself from a takeover approach from industry rivals and buyout firms. This is because it has that market cap of just £10bn, despite the fact that many analysts believe that its subsidiary Openreach is worth twice this sum. This could indicate that the BT share price is currently too low.
But while this may tempt investors, as shown by its 8% rise yesterday, it should also be taken with a pinch of salt. Firstly, there’s no guarantee that it will be taken over, especially due to the number of problems that BT faces. Secondly, BT’s role in national infrastructure networks means that any takeover would have to have political approval. That means takeover talk is just speculation for now and could come to nothing in the end.
Would I buy BT shares?
Although I do believe BT shares are currently underpriced, I’m still not buying. BT operates in an extremely competitive market, and has faced significant struggles over the past few years. With Covid-19 adding to these problems, I think it will continue to struggle for years to come. As a result, I believe there are plenty of better options out there.
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Stuart Blair 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.