Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.
Today I am looking at BT Group (LSE: BT-A) (NYSE: BT.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.
Broadband delivering bumper rewards
BT has spent years developing its broadband network across the country, shelling out billions of pounds in the process, to cement its place as the UK’s foremost internet provider.
The telecoms giant announced last month that it witnessed the strongest quarterly demand for its fibre services during July-September, with Openreach connections rising 70% during the period. The company now has 17m premises wired up to its network and counting, a situation that provides stunning upside potential, and the firm took home a record 93% share of new connections in the quarter.
Champions League a fee too far?
BT has made no secret of its desire to take on sports broadcasting behemoth British Sky Broadcasting in its own backyard, and boosted its burgeoning catalogue of sports rights this month by forking out £897m over three years to show live UEFA Champions League and UEFA Europa League matches from 2015.
The ambitious move to secure rights to Europe’s prestige football competition has been compared to the one made by Sky in the early 1990s, which then enabled Murdoch’s business empire to exclusively show live English top-flight games. But with no shortage of football on both premium and free-to-air television at present, there are fears that the amount BT has had to stump up is disproportionate to the potential rewards, and will fail to have the same effect that Sky enjoyed more than 20 years ago.
Stealing Sky’s sports crown
I for one do not share this view. After securing the right to show a handful of Premier League rights this season and next, the company has intelligently built its football portfolio through the purchase of ESPN from Disney, and with it the ability to show FA Cup games as well as UEFA Europa League, German Bundesliga and Italian Serie A matches from the continent.
The next round of bidding for Premier League rights is due to kick off in 2015, and BT is again expected to throw everything, including the kitchen sink, at the auction. With another favourable outcome BT could become the new home of football for the British armchair fan, a scenario that could send its revenues through the roof.
Investment to restrict returns?
But in the meantime, a backdrop of continued heavy capital expenditure in the broadband space, as well as investment in its television operations, could weigh on both earnings and dividend growth.
Indeed, City analysts expect BT Group to shell out dividends of 10.9p and 12.5p per share this year and next, payments that provide yields of just 2.9% and 3.3%. This compares unfavourably with a forward average of 3.3% for the FTSE 100 and 3.6% for the entire fixed-line telecommunications sector.
A stunning share selection
However, in my opinion BT’s long-term investment story is a compelling one. The business is already seeing the fruits of its substantial broadband investment scheme pay off handsomely, while its aggressive overtures within the premium television market is boosting its appeal in the red-hot ‘triple services’ market. I believe that BT is in robust shape to deliver strong shareholder returns in coming years.