Here’s how much I’d have today after investing £1k in BT shares five years ago

Has BT’s well-known name helped to make the stock a decent investment and does it have long-term potential now?

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What could be better than having part of a portfolio invested in a venerable old name such as communications services company BT (LSE: BT.A)?

Well, I don’t have any BT shares, but if I’d bought some five years ago, the stock price would have been around 311p. And that compares to the recent price near 184p, five years later.

BT shares have been losing

So, by holding for that five-year period, I’d have lost the value of 127p per share. However, that’s not the whole story because BT has paid some shareholder dividends. And the record of payments adds up to just over 48p, so I can knock that off my loss. 

The final calculation reveals I’d have lost the equivalent of 79p per share. And that means an investment in BT shares of £1k five years ago would be worth about £746 today — ouch! And in reality, the outcome would be a little worse than that because of trading costs when buying the shares in the first place. 

I think this exercise proves that well-known stock market companies don’t necessarily make good investments. And in the case of BT, there’s a big clue about why the stock performed poorly in the trading and financial record. Indeed, BT posted a decline in earnings for every one of the past five years.

However, City analysts have pencilled in a modest mid-single-digit percentage bounce-back in earnings for the current trading year to March 2023. And the share price began to reverse its downward trend in the autumn of 2020.

In February, the company said it expects the ongoing “impact of Covid-19 and supply chain issues” to cause a 2% decline in revenue for the current year. However, the directors are “confident” that BT can deliver growth in long-term normalised free cash flow. They predict an expansion of “at least” £1.5bn in the measure compared to that achieved in the year to March 2022. And it will come, they say, from lower capital expenditure (capex) and reduced operating costs. 

Better cash flow ahead

The directors expect better cash flow because the business is moving towards being an all fibre optic and all internet protocol network provider. And such cash flow benefits will arrive, they said, regardless of any benefits of increased revenue and further transformation efficiencies.

So, could it be that we’re seeing the start of a new phase of recovery and growth in the BT business? Maybe. But so far, I’m not impressed enough to invest in BT stock. The company carries a big pile of debt and operations consume a lot of capital as the company constantly reinvests. For example, the fibre optic rollout illustrates just how much BT needs to keep upgrading its networks just to stay competitive in the game.

With today’s share price near 184p, the forward-looking dividend yield is just over 4% for the current year. And it’s possible the share price could climb as the business turns itself around in the years ahead. However, I’m not expecting growth to shoot the lights out and see better potential investments elsewhere. BT is not for me.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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