So far this year the BT (LSE: BT-A) share price has done far better than its benchmark, the FTSE 100. The shares are up by close to 40%. Yet over five years they are down over 50%. So does the recent strong performance tempt me to buy the shares? Before answering that, just to note, the shares are not currently in my portfolio, although I held them a few years ago.
Why is the BT share price doing well this year?
One of the primary reasons BT shares have done so well this year is that expectations were so low to start with. We’ve seen a similar story this year at previously unloved Royal Mail. This year particularly there has been a bit of a preference among many investors for lower rated value shares after the more highly rated growth shares had a strong run in 2020. That’s one reason then and it’s beyond the control of BT or its management.
But I think the company has also made progress. That has made investors sit up and take note and buy BT shares.
Alongside preparing the UK for 5G, management is aiming to reduce costs by around £1bn each year to 2023, rising to £2bn each year from 2025. That’s good for profits and likely for shareholder returns.
Earlier this year, in a sign its relationship with the regulator Ofcom might be improving, BT was given the green light to continue charging higher prices for its full-fibre broadband services. It means BT’s Openreach will be free from price caps on its wholesale offering for at least a decade.
BT also owns EE, the mobile network. Along with BT Sports, this allows it to cross-sell to customers – something that telecoms companies have been aiming to do for a long time.
Paradoxically the suspension of the dividend may have helped the share price. One, because it frees up cash for investment, which in turn could fuel future returns. It also means there could be a boost when the dividend is reinstated – even if it is lower than it was pre-pandemic.
Would I buy?
I still don’t see BT as a business that will grow strongly. It’s too highly regulated by Ofcom, with which it has had a troubled relationship. I don’t think it compensates shareholders enough on the dividend side of things to be a good income share either, so I’ll avoid buying the shares.
The share price rise might be easier to justify if sales were strong. Yet, BT’s full-year underlying revenue fell 6% to £21.4bn and underlying cash profits (EBITDA) fell 6% to £7.4bn. So the share price seems to me to be out of kilter with the financial performance of the business. How long can that be sustained? That’s why I think there may be a sell-off coming.
While BT seems to be improving (arguably), I think there will also be better income and growth shares in the UK and indeed in the US.
Andy Ross 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.