Last week’s accounting scandal at BT (LSE: BT-A) was yet another example of bad behaviour infecting a high profile company. It’s also a stark reminder that investing in equities can require patience as well as a willingness to tolerate capital risk.
With this in mind, how long should private investors who didn’t contribute to Tuesday’s 20% share price fall be prepared to wait for the £30bn cap communications giant to recover?
Same old story?
Although companies will clearly differ in how well they’re able to respond to setbacks, it can pay to look at past examples.
Back in 2014, shares in Tesco sank following revelations that it has overestimated revenues by £250m. Heads rolled and Dave Lewis was brought in to steady the ship. Only in January last year did the share price appear to bottom out. On Friday, this stood at 205p. That’s still lower than before the revelation came to light and nowhere near the peaks achieved back in 2007. Based on this example, BT’s shareholders could be in for a long wait.
There are differences, of course. Those working in senior positions at Tesco appeared to be complicit in the scandal. By contrast, BT’s management in the UK was apparently unaware of the accounting irregularities until last October, despite rumours of it being common knowledge in Italy. I’m not sure which is more troubling.
While this may be simplyfying things, what’s certain is that the rate of recovery will increase or decrease depending on how BT’s management responds. Last year, retailers Sports Direct and JD Sports were accused of turning a blind eye to poor working conditions in their warehouses. Shares in the former fell — continuing a trajectory that began in 2014. Shares in JD Sports however, barely moved. The reason? Probably the way in which these allegations were handled. While the former engaged in a war of words with politicians, the latter said that it would “readily open” its doors to an appropriate independent body to conduct an inspection.
So far, the signs are that BT is adopting the latter’s measured approach. On Friday, it tried to reassure investors by stating that the situation was “under control“, adding that its Head of Continental Europe has already been ousted from his position. If it can build on this then the damage should be short-lived and BT’s share price will revert to being determined by the performance of the business rather than anything else. Recovery could be achieved in months rather than years.
Always diversify
Unfortunately, scandals can impact on any company without warning, even those in the market’s top tier. Indeed, the situation at BT has once again shown that the larger and more complex a business becomes, the easier it is for dubious practices to go undetected or even ignored. That’s why it’s vital for private investors to diversify their holdings so that they’re not dependent on any one firm to build their wealth over the long term.
Are shares in BT now cheap? Based on the usual metrics, it would appear so. Will shares of BT recover? Very probably. Will it require patience? Perhaps not as much as feared. The more transparent the company can be on its strategy to avoid a similar situation arising in the future, the more forgiving investors are likely to be.