Shares in BT Group (LSE: BT.A) remain under pressure following the company’s surprise profit warning and announcement of a deepening accounting scandal at its Italian business. However, quite a few directors at the company seem optimistic for the firm’s longer-term prospects and have made big purchases lately.
Big Purchases
In less than three weeks since the shock profit warning, seven directors (or their closely-related parties) have bought nearly 200,000 shares, worth almost £600,000. Non-executive director Anthony Ball and Kay Rose, wife of non-exec Nick Rose, were the biggest buyers and purchased 70,000 and 75,000 shares respectively, at a cost of 302p per share on 30 January. Chairman Michael Rake’s wife Caroline and HR director Alison Wilcox were also noticeable buyers.
It’s important to realise that these are very sizeable sums — for comparison, director purchases (outside of dividend reinvestment plans) amounted to just over £20,000 during the six months before the 24 January announcement. And that’s before we mention the sell trades during that period, some of which were very large.
Luis Alvarez, CEO of BT’s Global Services division, which oversees BT Italia, sold 190,000 shares on 2 December 2016. That represents a sale of more than a third of his total shareholding at the time, which netted him £674,500. The timing of the trade seems noteworthy in light of BT Italia’s problems, however there’s no suggestion of insider trading.
Sign of confidence
It’s always nice to see managers showing faith in their companies, but there may be more to it than that. There’s a lot of research out there which shows that whenever executives buy significant quantities of shares in their own companies, the stock often outperforms the market in the coming months. This would suggest that excess returns can be earned by following the pattern of director trades.
The rationale for following director trading is simple. The theory is that directors tend to have a better understanding of the day-to-day running of their company and can sometimes be privy to inside information. These information asymmetries can help directors to better time the market, which may give them an edge over ordinary shareholders.
Directors often buy after a significant drop in the share price of their company, and when they do so, this is usually seen as a sign of confidence in the company’s prospects. That said, directors are only people, and being like the rest of us, they can mistakes from time to time.
Should you join in?
There’s a lot of differing opinion on BT’s shares. Some are optimistic about the company’s cost-cutting potential following its acquisition of EE, the UK’s biggest mobile network operator. It’s for this reason that Barclays reiterated its “Overweight” rating on BT on 30 January.
I’ll also add that BT is generating robust cash flows despite recent setbacks, and this has enabled the company to promise dividend growth of at least 10% over the next two years.
Others are less sanguine though. Analyst Saeed Baradar of city broker Louis Capital is concerned about the prospect of a football rights bidding war and the impact this could have on its dividend sustainability. On top of this, BT has one of the most underfunded pension schemes in the world, and the deficit may still have further to rise as inflation expectations grow in the UK.