BT shares (LSE: BT.A) have had a rotten run over the last few years. Only a little over three years ago, the shares were changing hands for around 400p. Today, however, BT’s share price is just 192p.
At the current share price, BT does look cheap. Crunching the numbers, the forward-looking P/E ratio here stands at just 8.1, well below the median FTSE 100 P/E of 15. That said, I’m still not tempted to touch the stock. Here are a few reasons why.
Lack of revenue growth
For starters, BT’s revenue growth has completely stalled. In fact, it’s worse than that – the company’s top line is in decline.
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This trend doesn’t look good. If a company’s revenue is falling, it’s much harder to increase profits and dividends.
Expenditures are increasing
It’s also worth noting that BT faces significant capital expenditures (capex) in the years ahead due to 5G and the full-fibre broadband rollout. It also just agreed to pay another £1.2bn for the Champions League’s rights for the next three years. This could put pressure on free cash flow and profits. Just recently, the group advised in its half-year results that normalised free cash flow for the six months to 30 September fell a huge 38% due to increased capex. The combination of declining revenue and increasing costs is not good.
The dividend looks unsustainable
Lower cash flow could, in turn, put pressure on the dividend. I’ve said for a while now that I believe it’s only a matter of time until we see the payout cut.
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In my view, it’s a concern that BT has now paid three full-year dividends of 15.4p. When a company stops increasing its dividend, it’s often a sign that a cut is on the horizon. Interestingly, looking at FY2021 forecasts, it appears that a number of analysts expect the payout to be reduced next year.
Weak balance sheet
BT’s balance sheet also looks quite worrying. At 30 September, the group had net debt of £18.3bn on its books as well as a pension deficit of £5.1bn. By contrast, total equity stood at £10.3bn.
Analyst downgrades
I’ll also point out that analysts are still downgrading their earnings forecasts for FY2020 and FY2021. In the last month, the consensus FY2020 earnings forecast has fallen from 24.37p per share to 23.8p per share. That’s a decrease of nearly 2.5%. While analysts are downgrading their earnings estimates, the stock is likely to struggle to generate any positive momentum.
Labour government ‘risk’
Finally, adding further uncertainty to the investment case is the Labour government’s plan to part-nationalise the company if it wins the upcoming election. Right now, the chances of Labour winning the election look remote, however, anything can happen in UK politics at the moment, so the situation shouldn’t be ignored.
Putting it all together, I don’t see much appeal in BT shares right now. All things considered, I think there are much better stocks to buy today.