The FTSE 100 telecommunications provider BT Group (LSE: BT-A) saw a 7.4% drop in its share price in a single day following the release last week of its trading update. The shares are now trading close to the lowest levels seen in the past year.
This raises the all-important question – is it a good time to buy BT?
Growth investors’ prospects
The way I see it, the answer depends on your investing goal. If you are a growth investor – that is, one who seeks capital appreciation – then an investment in BT requires careful thought.
The company’s share price has been trending downwards for much of the past five years. That’s enough time to make any long-term investor lose confidence in the stock. But it’s not always been such a poor performer. Between its lowest in early 2009 to a high at the end of 2015, BT’s share price rose by 75% on average every year.
Allow me to provide some perspective. Last year, JD Sports Fashion was the biggest gainer in the FTSE 100 set. Its share price increase was to the tune of 80%. Between 2009 and 2016, the BT share price showed close to that much appreciation every single year on average.
For this reason alone, I find it hard to overlook the BT stock. The question that now faces the investor is this whether or not BT can repeat its past performance. According to analyst estimates compiled by The Financial Times, the average share price forecast is 225p for 12 months, which is an almost 40% increase from the current level.
This correlates with BT’s positive outlook for the future, despite this recent disappointing trading update. Even though both revenue and profit are down, chief exec Philip Jansen says that BT “remain on track” to meet full-year expectations. We will know for certain only once the 2019 results are out. But that’s still a few months away, in May.
High dividend yield
For now what we do know is this. With the fall in share price following the update, BT’s dividend yield is at 9.5%.
This makes it one of the highest dividend yielding stocks in the FTSE 100, after EVRAZ, Centrica, and Imperial Brands. Assuming that BT maintains its dividends at 15.4p going forward, I can be sure of this high yield at today’s share price. And, even if the share price rises to 225p, the yield would still be strong at 6.8%.
But what if BT cuts its dividends? I reckon the investor still stands to win.
Consider the worst-case scenario: The BT share price is at 225p and the dividend amount falls back to its lowest level in the past five year, which is 12.4p.
In this case the yield would be 5.5%, which is still higher than the FTSE 100 average dividend yield. Further, the stock has also appreciated almost 40%.
All in all, I think BT is potentially risky for growth investors right now. However, if passive income is the investing goal, I don’t see how we can go wrong with it.