Could there be a more frustrating share than BT Group (LSE: BT-A) right now? This giant of a telecoms company is popular with investors the length and breadth of the country because of its big, well-known name, and the way it was offered to the public during the privatisation craze in the 1980s.
Even my late grandparents piled into BT shares in the government’s first offering to the public in 1984, and they’d never owned a share in their long lives before that. But they made a packet on BT because they were wise enough to sell their holdings after they’d gone up a lot. When they were sitting on a big gain, they nailed down their profits, as successful traders and investors such as Mark Minervini are fond of saying.
The long trade
But lately, things haven’t been as good for BT investors. The share price is down more than 50% since the end of 2015, driven by a challenging trading environment and a murky outlook. Yet long-termers holding the shares since 1984 will have seen it all before. Back in 2009, for example, in the wake of last decade’s credit crunch, the share price dropped below 80p. And that was after flirting with 1,000p around the turn of the century when the stock market was juiced up on steroids in the dotcom tech bubble. Talk about volatility!
I think if I’d been holding the shares since the eighties, through all of that, I’d clearly be a ‘lifer’ and would keep holding on now to see what happens. I would have enjoyed a decent income stream from the dividend over the past three-and-a-half decades, so the volatile share price would almost be immaterial to me – as long as the firm doesn’t go into a death spiral from here, ending in its demise.
The value and turnaround trade
But what if I’d been tempted into the shares on valuation grounds in the middle of 2018, as many were? The long plunge in the shares had stalled, and operationally BT was in full turnaround mode making all kinds of noises about how it would get its business back on track. To start with, that ‘value’ trade went well. The share price moved from around 203p in May to just above 260p in November, for a gain of about 28%. But as I write, it’s back down at 227p – and looks like its still falling. As I said earlier, frustrating!
The damage was done by the release of the half-year report, I reckon. There was a lot of bad news in the financials that many weren’t really expecting, including me. Revenue and cash inflow were down and net debt was up. Those figures are moving in exactly the wrong direction to support a turnaround. But the biggest sin of all is that the directors trimmed the interim dividend by 5%, which I believe is a negative signal.
Indeed, I reckon the directors’ decisions regarding the dividend in any company can tell us a lot about the health and outlook for the underlying business. In the case of BT, I think the cut in the dividend signals ‘caution’ loud and clear. So I’d now avoid the shares, and sell if I’d bought for the value and turnaround trade in 2018.