Something remarkable has happened over the last six months — the BT Group (LSE: BT-A) share price has climbed by more than 25%. What makes it perhaps more surprising is that the FTSE 100 has been in a rout in recent months, losing 8% over the same timescale.
So have we finally seen the end of the rot that set in in 2015, and are BT shares back on the buy list now?
A look at the fundamentals certainly suggests the shares are cheap, with forecasts indicating a forward P/E of only 10. And the expected dividend yield now stands as high as 6%.
Fellow Fool Roland Head gave us his insights into BT recently, pointing out that he’s been convinced to buy BT shares. He suggests what many, I’m sure, are fearing — that after new boss Philip Jansen takes over from outgoing chief executive Gavin Patterson in February, there might be a dividend cut.
Dealing with debt
I think there’s a reasonable chance of that happening too, as a change of top leadership is often used as an opportunity to make changes that could otherwise be seen as an “I got it wrong” u-turn by the existing management. It’s the way new brooms sweep, as the saying goes.
And I think paying too high a dividend is something BT got wrong. I hope we’ll see more aggressive focus on tackling those huge debts and the pension fund deficit — the two things that have been weighing so heavily on the company for so long.
In fact, I think it’s plain crazy for a company to be paying big dividends while struggling with massive debts. Patterson’s turnaround strategy has been paying off, but I hope Jansen will take it up a level.
Troubled telecom
Shares in KCOM Group (LSE: KCOM) crashed a week ago after the telecoms and IT provider issued a profit warning and slashed its anticipated dividend. That’s been reinforced by Tuesday’s first-half figures.
The company’s lowered expectations include a 5% shortfall in EBITDA over previous guidance, and a goodwill impairment of £32.2m in its National Network Services segment. On top of that, EBITDA for the following year to March 2020 is now predicted to be “significantly below current market expectations.“
Net debt has climbed by 60% to £108.5m, from £67.8m a year previously. But that’s been put down to a one-off working capital outflow, due in part to “the decision, in order to drive down costs, to insource a managed service arrangement with a key partner.”
Dividend cut
The interim dividend has been halved to 1p per share, with the full-year payment set to be similarly reduced from 6p to 3p. After the share price fall, mind, that would still deliver a yield of 5% to anyone buying today (assuming there’s no further cut), though I don’t think I’d be too tempted by that just yet.
I’m gratified by the firm’s readiness to make unpopular decisions for the long-term good of its shareholders, and I’m convinced that cutting its dividend is the right thing to do at the moment.
Having said that, I see it was way too soon to be considering KCOM as a recovery investment just yet.