BT (LSE: BT-A) hasn’t been an easy business to run since its denationalisation and stock market flotation in 1984. The pace of technological change and shifting consumer demands, preferences and behaviour have been rapid in the telecommunications space. BT has had to attempt to lead where possible and respond where necessary. And to do so while encumbered with a high level of debt, including onerous pension liabilities.
Buy-and-hold underperformer
BT has provided a poor long-term return for many investors. The flotation price in 1984 was 130p, with further government sales at 335p in 1991 and 410p in 1993. Shareholders benefited from the demerger of O2 (worth about 83p at the time) in 2001. But with the company’s history also having been punctuated by a rights issue and dividend cuts, today’s sub-250p share price is disappointing compared with the returns delivered by many other FTSE 100 blue-chips.
While BT has been a buy-and-hold underperformer, early investors who sold during the dotcom madness (the shares peaked at over £10) walked away with a nice profit. As have contrarian investors, who bought at times of distress and sold when value was outed. With the shares now at a multi-year low, is this another opportunity for contrarian value investors?
Contrarian buy
BT’s shares were pushing towards 500p at their last peak in late 2015. The company had moved aggressively into the quad-play fight (broadband, fixed line telephony, pay TV and mobile), spearheaded by successful bidding for TV football and other content, plus the acquisition of mobile giant EE. However since then, the company has struggled to grow earnings per share, the TV strategy in particular has come in for criticism from some analysts and we’ve had an accounting scandal in the group’s Italian business and regulatory demands on its Openreach business. Finally, debt remains high and the pension deficit is deeply in the red.
My Foolish friend Roland Head has discussed BT’s Q3 results, which were released on Friday, and these show the group’s continuing struggle for growth. While the company’s pension deficit is a prominent concern for some investors, I’m actually quite sanguine about the outlook on this front. Rapidly increasing life expectancy over the past decades and low interest rates since the financial crisis have been a double whammy for deficits, but the pace of rising longevity has begun to slow quite markedly of late and interest rates look set to normalise over the next few years.
I’m less confident about assessing the outlook for the business itself. While I’m tempted to put BT in what Warren Buffett’s partner Charlie Munger calls the ‘too hard’ box, the company does have a history of self-healing with a refreshed strategy or focus. On this basis, with the shares at a multi-year low, trading at just nine times forecast 27.3p earnings and with a dividend yield of 6.3% on a forecast maintained payout of 15.4p, I rate the stock a ‘risky buy’. The buy of the decade? Possibly. It’s not an entirely fanciful notion that the shares could double back to that 500p of a few years ago with an improvement in business performance and market sentiment.