Last week’s full-year results sent the BT Group (LSE: BT-A) share price tumbling back to last year’s lows of around 205p. But was the news really that bad? I don’t think so.
In this piece I’m going to take a fresh look at BT and explain why I believe the firm’s new strategy could be just what’s required.
The dividend is safe – for now
BT’s new chief executive Philip Jansen has decided not to cut the dividend, at least for now. That’s good news for shareholders, who will receive a total payout of 15.4p per share for the year ended 31 March. That’s equivalent to a dividend yield of 7.4% at the time of writing.
However, big dividends are no good if they turn out to be unsustainable. Whether BT’s dividend is safe will depend on the success of Mr Jansen’s medium-term plan to ramp up investment in the firm’s network infrastructure.
The company is now targeting fibre to the premises (FTTP) for 15m properties by the mid-2020s, up from a previous target of 10m properties. The group’s mobile network, EE, will also play a key part in providing converged services (integrated broadband and mobile) and leading the UK’s 5G rollout.
This focus on infrastructure makes sense to me. The firm faces growing competition from well-funded rivals who are also trying to build fibre networks. I think BT should be able to lead in terms of coverage and service capability. But any advantage won’t be sustainable without further investment.
My expectation is that spending on TV sports rights will be scaled back to help fund the fibre rollout. I’m hopeful on this — there was almost no mention of BT Sports in last week’s results.
Big spender
Building telecoms networks costs money. Although capital expenditure is expected to be largely unchanged this year, at £3.7bn to £3.9bn, the group’s adjusted free cash flow is expected to fall from £2.4bn to between £1.9bn and £2.1bn. This doesn’t leave much headroom after the dividend, which currently costs about £1.5bn each year.
Net debt rose from £9.6bn to £11bn in 2018/19, mainly as a result of a £2bn additional payment to help reduce the firm’s £6bn pension deficit. This figure doesn’t look dangerous to me just yet, but in my view further increases could force the board to consider a dividend cut.
Is the price right?
Do BT shares offer good value at current levels? My favourite valuation measure in situations like this is called earnings yield, which compares operating profit with a company’s market value plus its net debt (enterprise value). This looks at a company’s profit margin based on its overall valuation, before tax or interest costs.
BT’s earnings yield is currently about 10%. That’s comfortably above my preferred minimum of 8% and is an attractive figure, in my view.
The shares look good value on other measures, too. A 2019/20 forecast price/earnings ratio of 8.1 indicates that the market isn’t expecting much of an improvement. And the forecast yield of 7.4% looks safer than it did a week ago.
I hold BT shares and believe the firm remains a long-term buy for income and inflation-linked growth.