BT Group (LSE: BT-A) (NYSE: BT.US) is a major holding for many private investors, but the firm’s performance over the last decade has been decidedly mixed.
Although BT’s share price has risen by 181% over the last five years, I believe that a number of problems remain, as I’ll explain.
What’s it worth?
Let’s start with the basics: how is BT valued against its past earnings, and the market’s expectations of future earnings?
|
P/E ratio |
Current value |
|
P/E using 5-year average adjusted earnings per share |
17.0 |
|
2-year average forecast P/E |
13.0 |
Source: Company reports, consensus forecasts
BT shares look fairly expensive on a historic basis, but analysts are pricing in significant growth this year and next, and the firm’s shares look reasonably priced on a forecast basis.
What about the fundamentals?
How has BT performed over the last five years? Let’s take a closer look:
|
Metric |
5-year compound average growth rate |
|
Sales |
-2.6% |
|
Pre-tax profit |
+22.9% |
|
Adjusted earnings per share |
+10.5% |
|
Dividend |
+9.6% |
Source: Company reports
These numbers present an interesting picture: it’s probably fair to say that BT was underperforming five years ago, and has since made up some of this ground. The firm’s operating margin has risen from around 10% in 2010 to about 16% last year, and its dividend has grown by nearly 10% per year, in line with adjusted earnings.
Despite this, I still have concerns about BT’s ability to keep growing its dividend, given the other pressing demands on its cash.
Firstly, BT’s pension deficit rose by 24% to £5.6bn last year. This problem will not be allowed to continue indefinitely, and further extra payments are likely to be required at some point, reducing the amount of cash available for shareholder returns.
Secondly, BT still has a pretty hefty debt pile. Although the firm’s level of indebtedness has come down somewhat in recent years, BT’s net gearing, excluding its pension deficit, remains high, at around 145%.
TV gamble
My final concern about BT relates to its decision to invest heavily in BT Sport, its television content offering.
According to BT, operating costs in the firm’s consumer division rose by 12% during the first quarter of this year because of the impact of BT Sport.
BT Sport is currently free to BT Broadband retail customers, with satellite and commercial customers paying subscription fees. I don’t believe this will be enough to fund the channel, but making broadband subscribers pay for it could result in them defecting back to Sky.
Buy, hold or sell?
BT’s profitability has improved in recent years, but I’m concerned by its consistently falling revenues: without top-line growth, BT’s profit growth will eventually be limited.