Should you double down on the BT share price?

The BT share price has plunged in value this year, but the company’s outlook is starting to improve. Now could be a good time to buy.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The BT (LSE: BT.A) share price has been one of the worst-performing investments in the FTSE 100 this year. Year-to-date, the stock is off around 50%.

Following this decline, the stock looks attractive from a value investing perspective. As such, I’m going to take a look at the business to establish whether or not investors should consider buying more of the stock at current levels. 

BT share price on offer?

To start, I’m going to take a look at why investor sentiment towards BT has collapsed this year. The coronavirus pandemic has significantly impacted the outlook for many businesses. However, it has benefited telecommunications groups, which have become essential services as many companies have asked employees to start working from home. 

We only need to look at BT’s latest trading update to see this trend in action. At the end of July, the company reported it expects revenues for the financial year ending March 2021 to fall between 5% and 6%. Compared to many other corporations, which have seen their revenues wholly wiped out in the pandemic, this is a relatively positive performance. 

Based on these projections, analysts are expecting the company to report earnings per share of 18.5p for the year on a net profit of £1.7bn. This target suggests the stock is currently trading at a forward price-to-earnings (P/E) multiple of just 5.3. 

Still, despite the company’s relatively right outlook and low valuation, investors continue to avoid the BT share price. 

Multiple headwinds 

I think investor sentiment has also been hurt by the company’s high level of borrowing. Also, management’s decision to cut the dividend didn’t help matters. Further, BT is also under pressure to invest more, which may lead to reduced shareholder returns for some time to come. 

There’s no way to sugarcoat it, BT does have some severe problems. But I feel as if the company’s current valuation more than makes up for these risks. 

BT is the largest telecommunications company in the country. While opponents are snapping at its heels, it’s going to be decades before any major competitor emerges. This gives the company an edge.

It would cost tens of billions of pounds to replicate BT’s existing network infrastructure. Even if the money were available, getting planning and regulatory permission would be another significant hurdle to overcome. 

Therefore, I’m optimistic about the outlook for the BT share price. The company does have problems, but these are relatively insignificant compared to its competitive advantage. It also seems to me as if many of these concerns are already reflected in the stock’s depressed valuation. 

As such, it might be worth buying BT as part of a well-diversified portfolio. Because the stock has historically changed hands for a P/E of around 10, there’s a possibility that when investor sentiment improves, the BT share price could double from current levels.

In my opinion, that potential reward is worth the risk of buying the shares. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »