As recently as June, BT Group (LSE: BT.A) was flying. The BT share price reached a 52-week high of 206p, but since then it’s been falling back, dropping 18.5%. I tend to like BT as a company these days, but I shy away from the stock’s valuation. So does this dip give me a new buying opportunity?
Despite the fall, investors who bought 12 months ago are sitting on a 65% gain today. But BT shares are still down more than 55% over the past five years. It’s one of the few on the FTSE 100 that can make the pandemic crash look like a minor blip. But how about the valuation?
On today’s BT share price, we’re looking at a trailing price-to-earning ratio of under nine. That’s based on the year ended March 2021, a year that saw earnings per share plummet by 20%. And it was just the latest in a string of annual earnings falls. Still, on the bright side, those painful years did bring about a much-needed change. In the 2020/21 year, BT paid no dividend.
For some reason, which defies any logic that I can understand, BT has stubbornly insisted on paying high dividends for years. Even as late as 2019, the company shelled out 15.4p per share, for a 6.9% yield. It was covered 1.7 times by earnings, which would be fine for a mature company with little debt and no great need for capital investment.
BT share price valuation
But BT’s debt is massive. At 30 June 2021, net debt stood at a bit over £18.5bn. It’s greater than the company’s total market capitalisation. On enterprise value, that takes BT’s trailing P/E multiple up to over 18. That is, if you bought the entire company and paid off its net debt, you’d have to stump up for that kind of valuation. Oh, and I’m ignoring the £8bn pension fund deficit, which would take the effective P/E close to 23 if you had to pay that off too.
Still, at least BT has knocked off its old habit of paying dividends it can’t really afford. Oh, wait.
At FY time when the company confirmed it would pay nothing for 2020/21, it added that payments are “expected to resume at an annual rate of 7.7p per share in 2021/22.” On today’s BT share price, that would yield 4.6%. In my view, it just does not make sense for a company with big capital expenditure needs, massive net debt, and a huge pension deficit, to be handing out cash like Rich Uncle Pennybags.
Growth vs value
Now, here’s where BT presents me with a dilemma. The founder of multinational telecoms firm Altice, Patrick Drahi, has built up a 12% interest in BT. That shows confidence in the firm’s future. And, I really do think we could be seeing some merger and acquisition attempts in the sector in the coming years.
So even if this is a richly valued business, it’s in a sector that I think could have a bullish near-term future. And I see a decent chance that the BT share price will steam ahead again over the next couple of years. But on balance, I will stick to my rule of avoiding debt-laden companies.