The BT Group (LSE: BT-A) share price has edged higher during the last year. Based on its dividend forecast for this fiscal year (to March 2023) this modest rise means BT shares currently carry a 4.1% dividend yield.
This beats the broader FTSE 100 average (3.9%) only by a whisker. Though the dividend yield improves fractionally to 4.2% for financial 2024.
BT’s yields are good rather than spectacular. But could the telecoms giant be a great buy for dividend growth? Here, I’ll drill into its dividend forecast for the short-to-medium term and reveal whether I’d buy BT shares for my portfolio.
BT’s dividend history
Like many UK shares, BT was forced to cut the dividend during the height of the pandemic. But the business got back into the groove last year when it forked out a 7.7p-per-share reward to investors.
And now it’s paying out again, City analysts think investors will continue to enjoy dividend increases. Full-year dividends of 7.8p and 7.9p are expected for this year and next.
What I like about these dividend forecasts is that they are well covered by anticipated earnings (between 2.5 times and 2.7 times) over the next couple of years. A reading above 2 times suggests a good level of security.
High bills hit dividends
Based on this metric, BT’s predicted dividends look pretty secure. But I still have concerns over future payout levels and particularly over the longer term.
The group’s decision to stop paying dividends during the pandemic wasn’t the first time income investors have been disappointed. The year before, it reduced the annual payout to 4.62p per share from 15.4p previously.
It’s also worth remembering that BT didn’t just axe the dividend in financial 2021 due to Covid-19 related uncertainty. It also acted to save capital for its fibre broadband and 5G rollout programmes. This is also why it reduced the annual dividend to 4.62p the year before that.
Remember that the stock’s infrastructure building drive continues to roll on. And the huge expenses related to this could derail dividend growth. It plans to spend £12bn on rolling out its fibre alone up until 2025.
So what next?
The danger to dividends is particularly acute for a couple of reasons. BT’s profitability is highly sensitive to broader economic conditions. So although dividend coverage is strong, a worse-than-expected downturn in the UK economy could put earnings estimates under severe pressure.
I’m also worried because of BT’s high debt levels. These will give it little-to-no flexibility to meet dividend forecasts if profits sink. Net debt stood at £18bn in March, up more than £200m year-on-year.
I like BT because of the critical role it will play in the digital age. And its huge investment in fibre and 5G could pay off handsomely as we become reliant upon fast and reliable communications. But, given its uncertain dividend outlook, I’d rather buy other shares for dividend income.