BT (LSE: BT-A) shares have performed well so far in 2022, rising 7% year-to-date. Broadening this horizon to 12 months, the stock has climbed a healthy 19%. I think the shares could offer a good hedge against rising inflation and at just 186p they look historically cheap. Considering these factors, will BT shares reach 200p in the near future? And if so, should I be considering adding the stock to my portfolio? Let’s investigate.
Inflation hedge
It’s no secret that inflation has been rising rapidly across the globe. In the UK, it reached a 30-year high last month of 7%. But BT is well poised to mitigate this risk as it already has an abundance of infrastructure and a well-established customer base. This means that it can move its prices in line with inflation to remain competitive.
In addition to this, interest rates have been rising to combat inflation. In the UK, the Bank of England raised rates to 0.75% in March, up from 0.5%. As rates rise, it will be more expensive for competitors to fund new infrastructure projects, which could keep BT in the top dog spot.
Another positive for BT that has helped push up the shares is the news that telecoms tycoon Patrick Drahi has been building his stake in the company. In June 2021, he acquired a 12.1% stake, which he has since topped up to over 18%. If such an experienced investor is making a move like that, it is generally a good sign. If Drahi decided to buy BT outright, then the shares would likely skyrocket above 200p as a consequence.
Risks for BT shares
The biggest risk I see for the shares is how rising interest rates will affect the firm’s debts. The company currently has a whopping £22.8bn worth of debt on its balance sheet. As interest rates rise these debts will become increasingly expensive for BT, putting big pressure on cash flows.
A risk tied to its debts is the large amount of capital expenditure that the firm is forking out. In an effort to upgrade its network, BT spent just shy of £5bn for FY22. This should be a good play in the long run, but short term, it could place pressure on debt repayments and dividends. If dividends are cut again, I think BT shares will struggle to climb back to 200p.
It’s positive that it has the power to control its own prices. However, with such a competitive landscape, if prices rise by too much then it could easily lose customers. This factor could be a tough balancing act for the firm moving forward.
The verdict
All things considered, I think BT shares have the potential to rise above 200p in the next 12 months. With inflation on the rise, investors are seeking asset-rich, defensive stocks like this. I feel the recent stock purchase by Drahi highlights this well. Therefore, I would be happy to add BT shares to my portfolio today.