Today’s results from BT (LSE: BT-A) show that the 2016 financial year was a hugely important one for the company. It included the acquisition of EE, huge investment in the company’s network and in sports rights, as well as an increase in revenue of 2%. This rise in BT’s top line is the company’s best performance for seven years and helped it record a rise in pre-tax profit of 9%, which shows that the company is moving in the right direction.
Clearly, BT is a rapidly changing business and today’s update contains encouragement in that regard. BT confirms that the integration of the EE mobile network is going well and that it expects to deliver greater synergies and at a lower cost than was first anticipated. BT also intends to invest £6bn in ultrafast broadband as it seeks to provide wider and faster coverage across the UK. And with BT Sport’s audiences up by 45% due in part to the company’s investment in sports rights, and BT Mobile having built up a customer base of 400,000 since launch, the company’s quad-play potential seems to be relatively high.
Forward guidance
Such strong performance has allowed BT to increase dividends per share by 13%, meaning it now yields 3.1%. The company has also decided to provide forward guidance on dividends and other financial metrics for the next two years, with shareholder payouts expected to rise at a double-digit rate over the period. This means that BT could become a viable income play over the medium term, although there are many other stocks that offer more compelling prospects for income-seeking investors.
Looking ahead, BT appears to be confident in its future outlook and with the market expecting the company to report a rise in its earnings of 1% in the current year as well as further growth of 10% next year, it could benefit from improving investor sentiment in the coming years. With BT having a price-to-earnings-growth (PEG) ratio of 1.4, there seems to be considerable upside in the company’s share price at the present time.
The debt issue
While BT has reported good results for the 2016 financial year, it still faces a number of risks. Chief among these is its debt level, which has increased by £4.7bn on a net basis versus last year. With interest rates due to rise, this could cause investors to become somewhat less excited about BT’s future prospects – especially with its balance sheet already containing a large pension liability. And while the quad-play market does hold growth potential, it could become overcrowded and lead to highly competitive pricing, thereby causing BT’s profit margins to come under pressure.
So, while BT does have an exciting future ahead of it and has performed well in the 2016 financial year, it may be prudent for investors to await a wider margin of safety before piling-in.