Telecoms giant BT Group (LSE: BT.A) has been locked in a fierce downtrend. Since early 2016 the stock has plunged around 60% and today’s share price close to 200p was last seen almost six and a half years ago at the beginning of 2012. Yesterday, the firm announced that chief executive of some five years, Gavin Patterson, will be stepping down later in the year and that the directors have started searching for his successor. However, I think Mr Patterson’s imminent departure has little to do with BT’s woes.
Such a brutal share price collapse draws the attention of value-seeking investors. After all, at today’s level, the forward price-to-earnings ratio for the trading year to March 2020 is around 7.5 and the forward dividend yield close to 7.8%. However, a low valuation in itself will not stop the stock going lower and there are a number of issues that could conspire to drive the share price down from here – perhaps even as low as the 80p we last saw during 2009.
Big debts, sliding earnings
One prominent feature of the accounts is the large net debt figure running close to £9.6bn. On top of that, the pension deficit of around £11.3bn is as good as debt by another name. Last month, BT revealed that it has agreed with the trustee of the BT pension scheme a recovery plan aimed at clearing the deficit over 13 years. BT will make payments of £2.1bn by March 2020, pay around £900m a year for 10 years after that and raise around £2bn for the pension fund by taking on more debt by issuing bonds. Naturally, such commitments will compete with the investor dividend for the firm’s incoming cash flow.
If earnings and cash flow hold up, things should be fine, but City analysts have been trimming their earnings forecasts lately. In April, analysts were predicting earnings to increase 3% for the year to March 2019 and 1% to March 2010. Today, expectations are for earnings to slide 4% and 1% respectively. The real long-term driver of share prices is earnings, so a downward trend in earnings is the last thing the stock needs if it is to change direction.
A turnaround plan
The directors seem to acknowledge the problem because an update released on May 10 bore the title Strategy Update to Drive Leadership in Converged Connectivity and Services, but it contained many items that looked more like a turnaround plan than anything else. For example, there’s restructuring, actions aimed at productivity improvements, relocation from the expensive London headquarters site, reducing capital intensity, lowering costs and reducing back office and middle management staff by around 13,000.
BT’s plan could work and we may see new growth emerge after all the restructuring and development activity planned. But I’m concerned by BT’s ‘square’ valuation — where the dividend yield is around the same figure as the price-to-earnings multiple — and by the falling earnings projections. The share price is still tumbling and I want evidence of a change in trend and investor sentiment before investing. Last month, the directors held the dividend at the previous year’s level suggesting an uncertain outlook, and I consider high yields to be more of a warning than an opportunity. If the dividend falls in the future, we will almost certainly find the share price much closer to 80p than it is now, so I’m watching from the sidelines for the time being.