Over the past decade, the BT Group (LSE: BT-A) share price has been one of the FTSE 100‘s most disappointing performers. At the end of June 2012, BT shares stood at 211p.
As I write today, I’m looking at 193p. That’s an 8.5% fall over 10 years. It’s not just a weak performance, it’s an actual loss. BT did pay dividends over the period, though, which offsets some of the pain.
But on share price alone, an investment of £10,000, 10 years ago would be worth just £9,150 today. That’s before inflation too, which would diminish the value even more in real terms. By contrast, a similar investment in a FTSE 100 tracker would have grown to £13,100, excluding charges.
How can a high-tech company in a growing industry, with BT’s competitive advantage in the UK market, let its shareholders down so badly? First, I need to check out what difference the dividends made.
Over the 10 years, dividend income would have added 105p per share to BT shares. That’s enough to turn the share price loss into an overall gain of 41%. But it’s still the equivalent of an average annual return of only 3.5%.
Unsustainable dividends
The dividend might provide some compensation for those suffering from share price losses. But I also believe it is one of the key factors leading to those losses in the first place.
For all the years I’ve watched it from an investment standpoint, BT has been prioritising dividends. And that’s good, providing the cash is there to pay them.
Unfortunately for BT shareholders, it hasn’t been. Earnings have been sliding at BT for years, and debt has been piling up. As recently as 2018, BT paid a dividend yielding 6.9%, while in the midst of an earnings slide.
This is a company that, at 31 March this year, had built up net debt of £18bn. Yes, eighteen billion pounds.
No free lunch
I’ve never understood why companies insist on paying big dividends while shouldering huge debt. If I bought BT shares, it would be like wanting the company to borrow money to give me, while eroding the value of my capital.
We just can’t have dividends for nothing. There needs to be enough surplus cash every year after reinvesting in future working capital. If not, dividends will be paid for some other way, and racking up debt won’t change that. Over the past 10 years, BT shareholders have been paying for it by way of falling share prices.
But other than confirming my long-term rule to avoid investing in companies carrying heavy debt, what have I learned?
BT shares future
Despite my misgivings, I think the future for BT shares could be brighter. For the year to March 2020, the company succumbed to the inevitable and slashed its dividend. The following year it dropped all the way to zero.
BT has reinstated the dividend this year, which I think is a bit risky, especially as debt edged up a little. But at least the company has significantly reduced its pension fund deficit. I still won’t buy while debt is so high. But if BT can make some inroads there in the coming years, I might think again.