Shares in telecoms giant BT Group (LSE: BT.A) are down almost 22% so far in 2019, after an especially traumatic month in August. And things would have been even worse had the price not ticked up since 23 August — on that day, BT shareholders were sitting on a 30% fall since the start of the year.
But the dire history of the BT share price stretches back a lot further than that, with the shares down 38% over the past two years and 56% over five. And if you really want something to cringe at, BT has fallen 83% since its dotcom bubble peak back in late 1999.
BT has hardly been the type specimen for long-term investments, at least not in terms of the share price. But at least the company has been paying decent dividends. With the share price falling, yields have been rising and this year’s forecast yield has hit 9%.
We’re now looking at a forward P/E of only 7, so BT surely looks like a buy, doesn’t it?
Dividend
Well, the dividend is coming under pressure from several directions. One is the lack of earnings growth — on current forecasts, EPS will have fallen 24% since 2016. That’s really not a scenario that supports any kind of progressive dividend. The predicted 2020 dividend would only be covered 1.6 times by earnings, and analysts are already suggesting there’ll be a cut of 12% in 2021 (though at today’s share price we’d still see a yield of 7.6%).
Will we see earnings growth any time soon? My Motley Fool colleague Rupert Hargreaves makes a good case for the answer being no. It’s a competitive market and BT does not head most consumers’ lists of favourites, and the company is desperately trying to improve profitability. Improve profitability? Should a company struggling to do that really be paying out 9% dividends?
BT is also in a business that dictates a need for high capital expenditure, which Rupert also touches on, and that’s another reason why I think there really needs to be significantly better dividend cover if the annual payments are to be sustained. In August, BT reported first-quarter capital expenditure of £931m (up from £839m in Q1 last year), with higher investments being made in 5G and in the ongoing rollout of fibre connections.
Debt
And perhaps the biggest millstone around BT’s neck is debt, which stood at £17,805m at 30 June, a massive £6,770m higher than at 31 March. That includes a lease liability required by IFRS 16 accounting requirements, and without that, net financial debt was put at a lower £11,642m. But it’s still a figure to make the eyes water.
In fact, it’s 2.27 times annualised adjusted EBITDA (based on the Q1 figure), and it even slightly exceeds the company’s entire market capitalisation. I think that’s way too high, and it’s another reason why I think paying such big dividends is madness.
BT frustrates me, because it’s a company whose shares could well be worth buying if only it would take steps to sort out its core problems. In all the years I’ve been watching BT, I’ve never seen any serious effort to address its debt, and I’d want to see that before I’d invest — and I’d want to see that vanity dividend, which BT can’t afford, significantly pared back.