I think the BT share price is a bargain buy

You would have to go back to 2009 to buy BT (LSE: BT-A) shares cheaper than they are today. Buying BT shares at a price of about 100p in mid-2009 would have been a good move, as they would have been worth over 500p by late 2015. Selling in the first few months of 2016 would have also been a good move since BT’s stock went straight down afterwards.

Shares in BT now trade around 100p again. It is tempting to think that if history repeats itself then the BT share price could be a bargain buy. But, as diligent investors, we have to consider why the share price is so low right now. Furthermore, we have to ask ourselves if there are good grounds for believing that BT’s fortunes might change. 

Network issues

The restrictions brought in to stop the spread of COVID-19 meant that Openreach, BT’s broadband division, could not send engineers to homes. A lack of live fixtures caused customers to lose interest in BT Sport. This helps explain why revenue at BT fell 7% to £5.25bn in the three months to 30 June 2020, which was the first quarter of the 2021 fiscal year.  The coronavirus crisis also prompted BT to announce that no dividends will be paid until at least 2021. We can blame the coronavirus crisis for taking the BT share price from about 150p (where it was before the market crashed) to today’s level of around 100p

But how about the 500p to 150p fall that happened before the world had even heard of COVID-19? From 2016 until early 2020, BT had taken its revenues from £18.88bn to £22.82bn. The purchase of the EE mobile network in 2016 had a lot to do with that. Net income, unfortunately, went the other way over and fell from £2.47bn in 2016 to £1.37bn in 2020. Write-downs for dodgy accounting and lump sums to avoid litigation had a lot to do with the fall in net income, although it should be noted that BT has not been unprofitable and these are one-off charges.

At the same time debt grew from £14.76bn in 2016 to £25.89bn in 2020, and operating cash was being gobbled up by capital spending. BT is upgrading its broadband and mobile network, sprucing up its stores, recruiting engineers and bringing call centres back to the UK. This all costs money, and the UK government’s decision to restrict Huawei equipment in 5G and fibre networks will cost BT again.

Is the BT share price a bargain?

I would encourage investors to think of where BT might be in a few years. BT Sport will be broadcasting a full schedule of fixtures. Openreach engineers will be busy. BT will have the largest modern fixed-line, broadband, and wireless network in the UK. BT can bundle and cross-sell mobile, broadband, and content to millions of customers.

I think the BT share price is a bargain buy when considering where BT could be in a year or so. Right now the BT share price is trading at around six to seven times expected 2022 earnings. Dividends should return by then, and the forward dividend yield should be in the high single digits. In the meantime, BT can use the money saved from the dividend cut to fund its capital investments instead of raising debt.