Ever since the Tell Sid privatisations of the 1980s, private investors have been buying BT Group (LSE: BT-A) shares for their dividends.
Unfortunately, last week saw BT announce plans to suspend its dividend for 18 months. The payout will then be cut by 50% to 7.7p from 2021–22.
As an income investor and a BT shareholder, I need to decide what to do. Is this a buying opportunity, or do I need to accept that I’ve made a mistake and sell up?
BT dividends: promise vs. reality
Mobile and broadband services are nearly as important as electricity and gas these days. So you might think that BT shares would be a reliable source of income, paying out regular dividends from predictable cash flows.
Unfortunately, it hasn’t turned out that way. BT’s dividend first reached 15p in 2000–01, during the tech boom. When the market crashed, BT cancelled its payout for a year and then restarted payouts at a much lower level.
By 2008, payments had climbed back to 15p. But once again, the market crashed. BT slashed its payout to just 6.5p in 2009.
History now seems to be repeating itself. BT’s dividend has remained stubbornly at 15.4p since 2017. I thought a cut was likely and even welcomed the idea. But I didn’t expect the company to cancel the dividend for 18 months and then cut it by 50% to 7.7p per share.
Why do BT shares keep crashing?
BT does have reliable revenue and decent profit margins. The firm’s accounts for the year to 31 March showed pre-tax profits of £2.4bn on revenue of £22.9bn. That gives us a pre-tax profit margin of 10%, which isn’t bad for a FTSE 100 firm.
Cash flow is quite strong, too. Normalised free cash flow for last year was £2bn, giving the stock an impressive free cash flow yield of 20%.
The problem is that this cash is all eaten up by the group’s spending commitments.
As the owner of mobile network EE, BT is spending heavily on upgrading to 5G. At the same time, the company is expanding its fibre broadband network.
Despite all of this spending, BT isn’t growing. The group’s revenue has fallen for three consecutive years. Last week’s results show that the rates being paid by most customers fell last year. If a business isn’t generating sales growth, it’s hard to generate profit growth except by cutting costs.
The situation is made worse by BT’s other liabilities. Net debt hit £18bn last year and the group also has a sizeable pension deficit.
BT shares could still be cheap
All the problems I’ve mentioned are well known and understood by the market. And to be fair, I think turnaround boss Philip Jansen has made the right decision by cutting the dividend.
If Jansen’s plans are successful, BT should become a more efficient and profitable business. The future dividend should be safer.
The stock’s trailing price-to-earnings ratio of five certainly leaves plenty of room for BT shares to rise. The dividend might also be worth waiting for. The planned 2021–22 payout of 7.7p per share would give a yield of about 7% at current levels.
I think BT shares are probably cheap. But I think there are probably better buying opportunities elsewhere at the moment. I’m not sure if I want to keep waiting for BT.