2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 52% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like BT Group (LSE: BT-A) (NYSE: BT.US) still offer good value, after five years of market gains.
Back to basics
BT shareholders have done well over the last five years; their shares have risen in value by 55% so far this year, and by 160% since December 2008.
However, billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.
As potential buyers (or sellers) of BT today, we need to assess whether the firm’s shares still offer good value at their current price:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 13.7 |
| Trailing dividend yield | 2.7% |
| Operating margin | 16.6% |
| Net debt | £8.1bn |
After such a strong performance, it’s not surprising that BT’s dividend yield has dropped below the FTSE 100 average of 3.2%, but the firm’s P/E rating of 13.7 is still below the FTSE average of 16.4, and is surprisingly modest.
One reason for this may be that BT remains burdened with a £6.7bn pension deficit that means its book value is negative — BT’s total liabilities are greater than its assets. Even if we exclude the pension deficit, BT’s £8.1bn net debt means that its net gearing is 140%, which is higher than I’d like to see, and definitely not a value indicator.
What’s in store for 2014?
BT has invested more than £1bn in its new BT Sport service, which it now claims has more than two million subscribers. By making BT Sport free to BT Broadband customers, it hopes to increase its share of the broadband markets, too.
The City remains broadly positive on BT’s strategy, and is expecting substantial dividend growth over the next 18 months, in-line with BT’s earlier commitment to improve its focus on shareholder returns:
| 2014/15 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 13.0 |
| Dividend yield | 3.3% |
| Earnings growth | 12% |
| P/E to earnings growth (PEG) | 1.4 |
Based on these figures, BT doesn’t look too expensive, and while I have some concerns about BT’s debt levels and TV strategy, it looks broadly attractive to me as an income investment.