I’ve been watching BT Group (LSE: BT-A) ever since I bought shares in its famous public flotation. It’s still shocking to see the what happened during the dot com bubble. But, putting that aside, there’s something else that saddens me. It’s the performance of the BT share price in the years after the bubble burst.
Today, BT shares are worth no more than they were 10 years ago. The decade got off to a bullish start, but that soon unraveled. And we’ve seen a steady slide since the end of 2015. The recovery since the depths of the pandemic crash might look good, but against that wider background, I’m really not so impressed.
So what’s behind this lengthy BT share price underperformance, and what might help reverse it? Two chronic problems have plagued BT. One is its massive debt, and the other is its pension fund deficit.
Looking at the pension deficit first, BT has been making good progress. But there’s still quite some way to go. The most recent triennial pension valuation was in May. And it revealed a deficit of £7.98bn at 30 June 2020. The current plan has BT paying more than £1bn per year until 2024, when it will reduce to £780m.
Debt really is a drag
CFO Simon Lowth said: “This agreement keeps us on track for zero funding deficit by 2030.” That will be good, for sure. But the annual payments until then will still be quite a drag on BT’s profitability. And I reckon that will mean a drag on the BT share price.
Then there’s debt. At 31 March, net debt stood at £17.8bn. It was down on the previous year, but only by £167m. That’s about 2.4 times adjusted EBITDA. With a need for constant capital investment, I can see why BT would get much of its funding from debt, but I see it as too high.
Long-term BT share price confidence
Debt, and the pension deficit, aren’t things that’ll disappear any time soon. But I really do think we need to see some of the weight being lifted before the long-term optimism returns.
But if I’m gloomy about these things, is there anything that I think would boost the BT share price in the shorter term? There is, and that’s a return to earnings growth.
BT has reported dwindling earnings over the past five years, with last year especially painful. Sure, it was a Covid year and all that, but a 20% EPS decline still hurt. The dividend had already been slashed in 2019 (and not before time, in my view), and it was canned altogether for 2020.
Dividends are back
But the dividend is coming back for the current year, at a planned 7.7p per share. That’s exactly half of the persistently high dividends prior to 2019, which BT couldn’t sensibly afford. The yield on today’s BT share price would be around 4%, which is attractive.
But it also appears to reflect confidence in the future of earnings, which I think is more important. So earnings progress in the current year is what I’d like to see. And first-half results could give BT a boost if things are looking good.