Elephants don’t gallop? Try telling that to anyone who watched the BT Group (LSE: BT.A) share price soaring against the FTSE 100 towards the end of 2015.
That was to a large extent on the back of breaking into the lucrative sports entertainment market, with BT wresting an impressive package of football rights away from rivals like Sky.
But there were a few shaking their heads at the price it was prepared to pay to win the bidding war. And a lack of focus on cost control has hurt the company’s investors over the past two-and-a-half years.
From a peak of a little over 500p in November 2015, BT shares have plunged by more than 50% to today’s 234p levels. To be fair, the firm’s Italian accounting scandal played a significant part in that, though it’s looking clear that there was a more fundamental problem of not being careful enough with the cash.
Smelling the coffee
But it does look like the company has been rethinking that ‘money no object’ approach to acquiring TV rights, and only this week we learned that it has lost its rights to NBA basketball and UFC ultimate fighting after pulling out of the latest bidding contest. And that comes a week after losing rights to Italian Serie A football.
The bottom line has been suffering from BT’s escalating costs too, with earnings per share peaking in 2016 (just, with a rise that year of only 1%), before turning south. By 2020, EPS is forecast to drop by 18% from 2016’s high. Something had to change.
Much of the recent culture at BT has been put down to outgoing chief executive Gavin Patterson, with the company saying it needs a change of leadership. I agree.
Reducing costs
My colleague Jack Tang has taken a look at BT’s change of heart and at its new strategy of getting its costs in order, pointing out that the company could be set to eventually save around £1.5bn per year. And BT does have massive communications infrastructure at its disposal, which it has been steadily improving at an impressive pace — the insatiable appetite for mobile broadband is just waiting for growth in 5G networks.
So did BT take its eye off the ball and forget its key strengths? I think so. Will the share price recover and catch back up with the FTSE 100 in the next year or two? I think so there too. But there are still two clouds on the horizon.
First is the pension deficit and the firm’s huge debt, which are going to be overshadowing the results for some years yet.
Watch that dividend
And then there’s that big dividend, forecast to yield 6.4% this year while being, I think, inadequately covered for a company with such high capital expenditure and such big demands on its cash. Fellow Fool Rupert Hargreaves has aired doubts on the sustainability of the dividend, and I’d go a little further — I think the dividend should be cut, and the cash used to improve BT’s long-term prospects.
But on a forward P/E of only around nine, I still think I see an oversold stock now.