I’ve had polarised opinions about BT Group (LSE: BT-A) for years. The company has had an annoying habit of doing some things very well, while at the same time lurching between management and financial crises. It has all shown in the BT share price, which has soared and slumped too many times to remember.
BT shares have lost more than half their value over the past five years. And that is despite a 38% recovery so far in 2021. Still, even with that, we’re looking at a 12% dip since BT’s high point of the year in March.
That suggests two possibilities to me. BT could be set for a strong long-term recovery, but investors just need a bit more convincing of it. Or, alternatively, there might just be too little confidence for such a recovery to take off sustainably. But which is it?
BT share price valuation
On the valuation front, there’s good and there’s bad. BT shares ended March 2021 on a trailing P/E of only a little over eight. On the face of it, that looks cheap. If anything, I’d expect a communications technology company like BT to be sporting a valuation that’s a bit higher than the FTSE 100 average. So maybe a long-term multiple of around 16 would be nearer the mark?
But against that, it’s easy to see why investors might not have the confidence to value BT any higher. After all, the year just ended brought a 20% fall in earnings per share. And that’s not just a one-off. No, BT’s EPS figure has tumbled by a full 40% over the past five years.
The dividend
Over the same period, BT stubbornly insisted on paying big dividends that it couldn’t afford. To me, that’s just reckless, and smacks of a desperate attempt to prop up the BT share price. But it wasn’t sustainable, and the dividend was first slashed in 2020 and then canned for 2021.
But, back at results time, the company told us it intends to reinstate the dividend at 7.7p per share in the current year. On today’s share price, that represents a dividend yield of around 4.2%. That’s not the biggest yield in the Footsie. But it might represent a sensible compromise between wanting to pay more, and retaining cash for capital expenditure and for dealing with debt.
A bit of activism?
Another recent development also suggests to me that BT is good turnaround value right now. I’m talking of the 12% stake that Patrick Drahi has taken, through his company Altice. While he appears to be supportive of management strategy, I can’t help expecting a bit of activism from him too. And that could be just what the BT share price needs to get going again.
But let’s not forget the millstone round the corporate neck here. It’s BT’s debt, coupled with that pension fund deficit. It has managed to avoid inflating its debt through the pandemic, but I will keep a sharp eye on it.
So where does this leave me? On balance, I am turning bullish over BT’s long-term prospects these days. It makes my August shortlist.