If I had bought shares in BT (LSE: BT-A) a year ago, what would have happened to my investment? Basically, very little. Over the past 12 months, the BT share price has moved down 4%. But the shares also have a 4% dividend yield. So my total investment return at this point would be basically zero.
Could buying BT shares today be a smart move for me?
Price and value
In the words of Warren Buffett, price is what you pay and value is what you get.
So just because I can scoop up BT shares today at a similar price to what I would have paid a year ago does not necessarily make them good value. Instead, I need to look at the underlying fundamentals of the business.
Arguably they have been worsening. Revenue fell last year, as it had for several consecutive years previously. Profit fell, for the third year in a row. Although the dividend was the highest it has been since the pandemic, last year’s payout was only half that seen just three years before.
None of those things make BT sound like a great business moving in a rewarding direction. So, what is going on?
Future prospects for BT
In reality, the sluggish BT share price reflects that there are multiple businesses in one company here.
Its legacy telephony operation can be managed as a cash cow. Although the long-term demand outlook is not promising, the company might still be able to squeeze profits out of this business for decades to come. That can be seen by looking at the consumer business. Last year, its revenues declined under 1% year on year. But earnings before interest, taxation, depreciation, and amortisation (EBITDA) rose 6% while normalised free cash flow was up 28%.
Separate from the cash cow legacy business is Openreach, the subsidiary behind the backbone of the country’s internet. I think it has more promise, as it should see ongoing demand growth and be able to use its pricing power. That was not highly obvious from last year’s performance at the division, though. Revenues were up by only by 4%. Although that is not bad, it is not what I would regard as high growth. EBITDA grew 8% while normalised free cash flows fell by the same amount.
Overall, then, the BT business is a mixed bag. What I struggle with when it comes to the investment case is the lack of exciting growth. Even if Openreach can increase its revenues and profits, the total BT business has been shrinking and its collection of businesses means that may continue.
Is the BT share price attractive?
In fact, I think that helps explain why the BT share price has basically been moving sideways. There is not a strong growth story here, but the income outlook is also questionable. The dividend has shrivelled in size and if earnings keep falling, it may get even smaller in future.
That is why I do not plan to add BT to my portfolio.