Share price fall

The shares are down 9% over the past 12 months, which isn’t so bad.

But that hides the volatility of 2022. In the three months from the recent peak in July, the share price slumped by 35%.

The shares saw a sharp dip on 28 July, when Q1 trading details were released. Revenue increased, and EBITDA rose by 2%. But pre-tax profits fell by 10%, due to disappointing performance in BT’s enterprise division.

Since then, the share price has carried on down. But I can’t see any further bad news having emerged, and it really just looks to me like it’s due to sentiment.

A share price fall on its own is not a good reason to buy a stock. But BT’s forecast price-to-earnings (P/E) ratio is now under seven. And the forecast dividend yield is above 6%.

Dividends

And that’s my next potential reason to buy. A 6% dividend is a good one by FTSE 100 standards. And if the shares are undervalued, this could be a great opportunity to snap them up and lock in an attractive yield.

Saying that, I’ve been critical about BT’s dividend policy in the past. Despite huge debt, which reached £18.9bn at 30 June, BT has prioritised its dividends. In general, I don’t see that as the best use of surplus cash.

I prefer companies that focus on improving their long-term balance sheets ahead of stuffing shareholders’ pockets in the short term. But there is an argument that the cash amount of the dividend is very small compared to the debt.

That doesn’t entirely convince me. But as long as it’s BT’s approach, and it’s committed to maximising dividends, it’s an argument to buy. And if we’re going to buy, it’s surely best to buy when the shares are low and the yield is high.

Fibre and 5G

While BT’s financial picture might look a bit clouded now, its full-fibre broadband and 5G coverages are growing at a healthy pace. As of 30 June, the BT Openreach fibre network had reached more than eight million homes and businesses in the UK. There’s still some way to go, but the company expects to accelerate its rollout to 3.5 million new premises in the current year.

The EE 5G network had also reached more than 55% of the country’s population at the same stage.

Reasons not to buy

There are reasons not to buy BT shares too. The big one for me is that massive debt, which makes BT’s low P/E a bit misleading. The headline ratio might be under seven. But adjusting for that £18.9bn debt, we get an enterprise value P/E of around 17. And that looks less attractive.

If not for the debt, I think I’d buy BT shares today. But as it stands, I’ll remain cautious and keep away for now.

That comes despite a late July trading update, in which chief executive Philip Jansen said “BT Group has made a good start to the year; we’re accelerating our network investments and performing well operationally.  Despite ongoing challenges in our enterprise businesses, we returned to revenue and EBITDA growth in the quarter.“

The problem is that, though adjusted EBITDA did grow in the quarter, it was only by 2%. And it came from revenue that only rose by 1%. Deeper into the accounts, pre-tax profit fell by 10%.

Cash outflow

BT also reported negative free cash flow, at more than three times the figure from the first quarter last year. From a £43m free cash outflow in Q1 of 2022, BT has gone to free cash outflow of £205m.

BT does seem to be rolling out its Openreach fibre broadband at a decent pace, and it now reaches more than 8 million UK homes and businesses. The company’s new 5G network rollout is going well too, and now covers more than 55% of the population.

This hopefully bodes well for the future. But the boding has been going on for years, and shareholders’ patience looks like it’s being increasingly tested as they wait for the bumper profits.

Sell-off

Couple this with our deteriorating economic outlook, and I can understand the sell-off. I know people who have already downgraded their BT packages to save money, and that’s surely likely to continue.

Oh, and we’re looking at a possible toughening of the competition too. Big rival Vodafone has confirmed it’s in discussions to merge its mobile operations with Three. Vodafone would own 51% of the joint venture company, which could command an estimated 37% of UK mobile revenue.

That would leapfrog it into first place, ahead of BT’s EE network, which currently has 32% of the market.

Low valuation

Still, the BT share price weakness does make valuations look attractive. Forecasts suggest a price-to-earnings (P/E) multiple of only around 6.2 now, which is super low. And it’s propelled the forecast BT dividend above 6%.

But I see some key cautions here. Firstly, I don’t have too much confidence in forecasts in the face of a likely recession. BT did reiterate its confidence in its full-year outlook. But this is after just one quarter, and there’s a long way to go yet.

Dividend vs debt

I have another big issue too. I invest for dividends, so normally I’d be drawn to that potential 6% yield. But I see BT’s dividend policy as misguided.

Net debt stood at a whopping £18.9bn at 30 June, up £0.9bn from 31 March. And the torrent of free cash leaving the company rose, as we saw, to £205m in just a single quarter. Oh, and BT still has a big pension fund deficit, which is a further drain on its cash.

So is it time to buy BT shares? Not for me. And it won’t be until BT makes more effort to address its debt.

Three concerns

One of the reasons behind the sharp drop in the BT share price since July can be attributed to the company’s disappointing Q1 trading update. Although both revenue and adjusted EBITDA saw minute increases, investors were disappointed to see the firm’s bottom line deteriorate given the already bad-looking financials.

Prompting even more anxiety, BT has had to deal with further concerns over the last couple of months. Most recently, its main competitor, Vodafone, confirmed that it’s in talks with Three’s parent company Hutchinson, to form a joint venture (JV). The JV will combine Vodafone and Three’s UK mobile operations, with Vodafone owning 51% of the merged company.

According to Jefferies, this would make it the largest mobile network in the UK, with 37% of the market share by revenue, while BT lags behind at 32%. With the Virgin Media O2 merger accepted by the competition authorities, another approved move here could further ramp up competition for BT.

To make matters worse, EE is being investigated by telecoms regulator Ofcom over concerns about the clarity of EE’s customer contracts. There are concerns that BT failed to comply with rules surrounding clear and simple contract information before new deals are signed with customers. If found guilty, BT may be forced to pay a fine, which could tarnish its image and hurt its bottom line even further.

Down to the wire

CEO Philip Jansen reiterated the FTSE 100 firm’s outlook for the year, which remain unchanged. Nonetheless, investors have every right to be worried about BT’s ability to meet its guidance given the current inflationary environment.

This worry stems from the company’s breakdown of revenue. Although the Consumer and Openreach divisions saw decent growth, it was offset by legacy product declines and the current tough economic environment for businesses, which led to declines in the Global and Enterprise divisions. As such, it’s looking increasingly likely that BT may have to rely on the JV it has with Warner Bros. Discovery to prop up BT’s top line figures in the short to medium term.

Put on hold

So, are BT shares a good investment for my portfolio then? For starters, BT’s balance sheet isn’t in the best state. A debt-to-equity ratio of 143.5% isn’t ideal in the current macroeconomic environment as it could make servicing debt expensive and impact net income.

Not to mention, Deutsche recently rated the stock a ‘hold’, with a price target of £1.40, thus not giving the shares much upside from current levels. While I think all the headwinds have been priced in, I still won’t be investing in BT shares. I believe I can grow my wealth by purchasing shares in other companies with better financials.

In a couple of words, ‘not very’.

BT shares have tanked

BT shares are down 26% in 2022. So, £1,000 invested here would now be worth around £740, without factoring in the costs of buying the position.

Clearly, we need to put this in context. Thanks to galloping inflation and the invasion of Ukraine, global markets have been in a funk. Many FTSE 100 members have seen their values fall by far more than BT. Housebuilder Persimmon, for example, has dropped by more than 50%. Ocado is down almost 70%!

So yes, the performance has been poor but some of this is clearly unrelated to anything the company has/hasn’t done.

I didn’t invest in BT shares back in January. But would I buy now? As usual, there are attractions and risks to consider.

Dirt cheap source of dividends

BT shares trade on a valuation of just six times forecast earnings. This makes the stock one of the cheapest in the FTSE 100. It’s also low relative to the telecoms sector as a whole.

I continue to believe that BT shares are a great source of dividends too. Sure, these can never be guaranteed but the 6% yield forecast this financial year (to the end of March 2023) is expected to be covered well over twice by profit. This makes the possibility of a cut unlikely, in my opinion. Although not enough to beat inflation on its own, that payout is also far more than the 4% offered by the FTSE 100 as a whole.

Third, the fact that French billionaire Patrick Drahi now owns almost a fifth of the company suggests that rumours of a potential bid won’t go away any time soon.

Debt-heavy

But BT is far from a home run. The recent news that FTSE 100 peer and rival Vodafone was looking to merge with Three is unlikely to be welcomed by management. Then again, there’s a possibility that the Competition and Markets Authority may veto a deal.

More problematic for me is the fact that BT remains heavily indebted. That’s not exactly attractive if interest rates continue to rise and could mean that hikes to the aforementioned dividend may remain subdued going forward.

Although margins aren’t terrible, the huge costs involved in its line of work also mean that the returns BT makes on the money put to work aren’t worth shouting about. Unfortunately, it’s this that plays a big role in helping a company (and my money) to compound in value.

Based on fundamentals, BT just doesn’t hit the spot.

My verdict

Like all stocks, I don’t know where BT shares go in the near term. Thankfully, I don’t need to care all that much. My investing horizon extends to decades, not weeks or months.

Notwithstanding this, I’m committed to buying the best businesses I can in this period of market malaise. As such, I can think of far better places to stash my cash now unless generating passive income were my one and only goal.

[Just beginning your investing journey? Check out our guide on how to start investing in the UK.]

Greggs 

What it does: Greggs makes and sells sweet and savoury foods through more than 2,000 stores across the UK.

By Royston Wild. Morning-goods retailer Greggs (LSE: GRG) might not be suitable for risk-averse investors. Even food specialists are suffering from weakening demand during the cost-of-living crisis. At the same time, worsening inflation is putting growing pressure on the baker’s bottom line. 

Having said that, I think it has the tools to continue growing earnings even as recession approaches. So do City analysts, who think the business will report earnings rises of 1% and 4% in 2022 and 2023 respectively. 

Sausage rolls, coffee, doughnuts, and the other goods Greggs is famous for sell well at all points of the economic cycle. What’s more, the bakery chain sells its products at low price points, giving its revenues column extra resilience when consumers feel the pinch. 

This is why like-for-like sales rocketed 22.4% during the first six months of 2022. I’m expecting another impressive report when third-quarter trading numbers are released on Tuesday, 4 October. This could give the Greggs share price a lift following recent heavy weakness. 

Royston Wild does not own shares in Greggs. 

Associated British Foods

What it does: Associated British Foods is a diversified collection of businesses that includes retail, grocery, sugar and agriculture.

By Andrew Mackie: In a worsening economic environment, it might seem strange that I would choose a company whose revenue is so heavily reliant on retail. However, with Associated British Foods (LSE: ABF) share price languishing at a 10-year low, I believe the market is missing a trick here.

UK sales at Primark have been performing well and are nearly back to pre-Covid levels. However, the same cannot be said across continental Europe where like-for-like sales are down 18%. As the cost-of-living crisis intensifies, ABF is starting to see signs of a consumer spending slow down across all markets.

Whilst retail is struggling, other parts of the business are thriving. Surging sugar prices has meant that revenues are well ahead of last year. In addition, UK sugar production is up 14%. It’s a similar story in grocery, which is benefiting from price increases across a range of branded products.

ABF’s share price is now trading 17% lower than during the pandemic. That is despite all its Primark stores being open, a successful launch of its UK website earlier in the year and an expected Christmas launch of a trial click and collect.

Opportunities to pick up cheap shares in high-quality companies with proven business models don’t come along very often. The fact that ABF is a family-run business provides me with added reassurance. That is why I have been buying more of its shares recently.

Andrew Mackie owns shares in Associated British Foods.

IG Group

What it does:  IG Group Holdings is a UK-based financial technology company providing an online platform for traders.

By Paul Summers: Given concerns over rapidly rising interest rates and a prolonged recession, I suspect global markets could remain choppy for a while. Should this be the case, spread-betting supremo IG Group (LSE: IGG) might be a great place to park my cash. 

In contrast to most listed companies, this high-quality outfit actually benefits from volatility. This may be one reason why the share price has held up fairly well (albeit still down) over 2022.   

While never guaranteed, the dividend stream also looks enticing. IG shares currently boast a forecast yield of 6%. As inflation continues to bite, that’s worth grabbing in my opinion.

Sure, there are risks here. The industry it operates in is often targeted by regulators. Competition for clients also remains fierce.

With sky-high margins and a robust balance sheet, however, I can think of a lot worse places to be invested in these tricky times.

Paul Summers has no position in IG Group

B&M European Value Retail

What it does: B&M is a leading staple & discretionary discount retailer with over 1,100 stores across the UK and France.

By Zaven Boyrazian. B&M European Value Retail (LSE:BME) is one of the UK’s leading discount retailers for both staple and discretionary items. The group operates 1,016 stores across the country under the B&M and Heron Foods brands, with a further 109 locations popping up in France.

Lately, the tailwinds from the pandemic have started dying down, causing revenue growth to seemingly stagnate. Unsurprisingly, its share price has followed, falling by a massive 50% courtesy of the stock market volatility.

However, as consumers seek to cut spending, the popularity of discount retailers is rising. And suppose the worst comes to pass and the UK falls into a recession. This could create ample opportunities for B&M to steal market share from its larger competitors.

Being a discount retailer obviously means that pricing power is basically non-existent. But with positive trends already emerging in its latest results, paired with a P/E ratio of 7.6 and a dividend yield of 5.2%, I believe Now could be an excellent buying opportunity for my stocks and shares portfolio.

Zaven Boyrazian does not own shares in B&M European Value Retail.

Greggs

What it does: With around 2,300 outlets, Greggs is the UK’s leading fast food chain. It focuses primarily on baked goods.

By Stephen Wright. In an uncertain economic environment, I’m looking for something stable. That’s why Greggs is my Best British share to buy in October.

Peter Lynch famously said that his initial interest in Dunkin Donuts came from seeing the constant queues outside – even in a recession. I feel the same way about Greggs.

From what I can see, the current cost-of-living crisis appears to be making no difference to this company. It’s easy enough to see why. 

The company’s products are familiar and inexpensive. This means that they’re less likely to get cut from the budgets of price-conscious consumers.

At a price-to-earnings (P/E) ratio of under 16, I don’t think that the stock is particularly expensive. The company also generates solid returns on equity.

There’s a 3% dividend for investors looking for passive income and the company plans to expand to 3,000 stores in the future. I’d be willing to buy shares for my portfolio at today’s prices.

Stephen Wright does not own shares in Greggs.

BT 

What it does: BT is a UK-based telecommunications company with operations in over 180 countries.

By Charlie Keough. My top British stock for October is BT (LSE: BT-A). The BT share price has failed to take off in the last five years. And this decline has continued into 2022 due to inflationary pressures. However, I think its shares could be a strong long-term buy.  

Firstly, its attractive 5.7% dividend yield is a great way for me to put my money to work at a time when stagnant cash is losing value.  

Further, I like the large infrastructure that BT already has in place. This provides the firm with, to some extent, a higher degree of pricing power. It’s also on track with its Openreach rollout, while its 5G network now covers more than half of the UK.  

What does concern me is its £19bn of debt. With interest rates rising, this will only become more difficult to eradicate. 

However, I think its solid foundations will help BT overcome the challenges it will face in the foreseeable future. I’d buy some shares this month.  

Charlie Keough does not own shares in BT.  

BAE Systems

What it does: BAE Systems is a leading defence, aerospace, and security company that serves both the UK and US governments.

By Edward Sheldon, CFA. BAE Systems (LSE: BA) strikes me as a relatively safe pick in the current environment. Given the high level of geopolitical uncertainty arising from the Russia-Ukraine crisis and the tension between China and Taiwan, governments are unlikely to reduce their defence spending any time soon.

Aside from the supportive backdrop, one thing I like about BAE Systems is the attractive dividend yield on offer. At present, analysts expect the company to pay out 26.3p per share for 2022. That equates to a yield of over 3% at the current share price. The company is also buying back its own shares – an extra reward for shareholders.  

It’s worth pointing out that if the Russia-Ukraine crisis was to come to an abrupt end, sentiment towards defence stocks could deteriorate. This could have a negative impact on BAE Systems’ share price. Overall, however, I think BAE is a good stock to own right now.

Edward Sheldon has no position in BAE Systems.

InterContinental Hotels Group

What it does: InterContinental Hotels Group operates a number of different hotel brands across the globe, including Regent Hotels, Crowne Plaza, and Holiday Inn. 

By Andrew Woods. My top British share for October is InterContinental Group (LSE:IHG). This hotel operator was battered during the pandemic, as virtually all of its hotels were forced to close. As a result, it slumped to a $280m pre-tax loss for 2020. By 2021, however, when many restrictions subsided, the business reported a pre-tax profit of $361m.

For the six months to 30 June, the firm stated that operating profits doubled to $377m. Furthermore, it announced that it was reinstating its dividend for the first time since 2019. It paid an interim dividend of ¢43.9 per share, a 10% increase compared to the same period in 2019. Moreover, it’s embarking on a $500m share buyback scheme. This is a signal that the company is in a strong financial position, although I’m always aware of the threat of further pandemic variants.

The business also offers geographical diversity, with established operations in the US and Europe, and a growing presence in China.

Andrew Woods has no position in InterContinental Hotels Group.

Reckitt

What it does: Reckitt is a consumer goods company. It primarily produces health, hygiene, and nutritional products, and is famously known for brands such as Dettol, Strepsils, and Durex.

By John Choong. As the UK heads into a recession, discretionary spending is expected to decline. However, demand for products from Reckitt (LSE: RKT) isn’t likely to wane due to its inelasticity as consumer staples, thus making it a contender for a position in my portfolio this October.

Although inflation can’t be ignored, the superiority of its brand appeal is unmatched across many of its product categories. This has allowed the group to raise the prices of its products while maintaining healthy profit margins of 22.5% in its latest half-year results, with management expecting better growth in the second half of the year. The fact that Reckitt earns the bulk of its revenue from outside the UK also makes it a safer investment due to the geographical diversity of its income steam.

Nonetheless, it’s worth noting that Reckitt’s balance sheet isn’t the healthiest. Having quite a high debt-to-equity ratio (107%) isn’t ideal in a high interest rate environment, and is something I should definitely take note of.

John Choong has no position in Reckitt.

What are they?

Ocado describes itself as “the biggest grocery retailer of its kind in the world”, and hopes to take advantage of the long-term trend towards online shopping. Its Ocado Retail business is a joint venture with Marks and Spencer. Ocado says it has over 800,000 active customers.

BT claims to be “supporting customers to live, work and play together better”. Its consumer division boasts of 30m mobile and fixed broadband customers in the UK. BT also has another 1.2m business users.

What about their financial performance?

Ocado announced a loss before tax of £211m in its half-year results published in July, compared to BT’s profit of £482m in the three months to June.

Ocado has never paid a dividend.

Since it floated in 1984, with the exception of one year due to the pandemic, BT has always declared a dividend. BT’s yield is currently nearly 6% — well above the FTSE 100 forward-looking average of 4.1%.

Ocado reported revenue of £1.3bn in the 26 weeks to 29 May 2022, down 4% compared to a year ago. The company moved from a net cash position of £189m at May 2021, to having a net debt of £759m 12 months later — a swing of £948m.

BT’s sales rose by 1% to £5.1bn in the three months to June 2022, and its net debt increased by £325m compared to a year earlier.

Are they dirt-cheap?

So, are either of these shares dirt-cheap?

Ocado and BT have come onto my radar because of the recent dramatic fall in their share prices. But what is their underlying value?

Warren Buffett once said: “Price is what you pay. Value is what you get.”

A company can be valued based on either its assets or its future expected cash flows.

Ocado has only made a profit three times in 22 years, making it difficult to assess its earnings potential. Ocado’s current market cap is roughly three times that of its net assets of £1.6bn. To my surprise, Ocado has a stock market valuation equal to that of J Sainsbury.

BT has a track record of profitability. It’s current price-to-earnings ratio is seven, and is much lower than its FTSE 100 peers. BT had net assets of £15.3bn at the end of March, approximately 18% above its market cap.

Who wins?

So, if I had to choose between these two shares, BT would win hands down.

I am not alone.  

French billionaire Patrick Drahi appears to see potential in the telecoms giant, having quietly increased his stake to over 18% in recent months. Furthermore, the UK government has waived its previous objection — on grounds of national security — to Drahi’s interest.

But, I am not going to invest in either Ocado or BT at the moment.

It doesn’t seem right to me that Ocado is valued more like a tech stock than a retailer.

As for BT, I think its current market cap reflects concerns over its growth potential. BT has significant market penetration, and the current squeeze on disposable incomes will affect its ability to increase revenues further.

Its shares are particularly popular with dividend investors right now. This has something to do with the sinking BT share price that has driven dividend yields sharply higher. The telecoms titan has fallen 25% in the past three months alone.

For this financial year (to March 2023) the dividend yield sits at a healthy 5.8%. And the figure evolves to an even better 5.9% for next year.

To put this in perspective, the FTSE 100 forward average sits around two percentage points lower.

So is BT a top dividend stock to buy today? Here, I’ll examine its dividend forecast for the short-to-medium term and reveal whether I’d buy BT shares for my own portfolio.

Dividends tipped to rise

It has had a patchy track record as an income stock in recent years.

The business cut the annual payout in fiscal 2019 and paid nothing the following year as it rebased dividends. BT took this step in response to uncertainties created by Covid-19 and the heavy investment it’s making in telecoms infrastructure.

Dividends returned last year with a total shareholder payout of 7.7p per share. And City analysts think rewards will rise to 7.8p and 7.9p in 2023 and 2024 respectively.

Based on current earnings forecasts it should have what it takes it meet these projections too. Predicted dividends are covered between 2.4 times and 2.7 times by expected earnings. Any reading above 2 times is said to provide a wide margin for error.

A top value stock?

At first glance, it would appear to be a terrific all-round value stock.

As well as those big dividend yields, BT’s sinking share price also leaves it trading on a forward price-to-earnings (P/E) ratio below the widely-accepted bargain watermark of 10 times. Furthermore, its multiple comes in way below the FTSE 100 corresponding average of 14 times.

Too risky right now

But this doesn’t necessarily make the shares a slam-dunk buy in my opinion. Indeed, I believe the company’s low valuation reflects the range of significant risks it faces.

The long-term revenue opportunities for telecoms companies are colossal as the digital revolution kicks off. Our need for fast-fibre broadband is rising, thanks to factors like flexible working and the growth of streaming.

However, this may not necessarily translate to big profits at BT. The huge rollout of 5G and broadband is costing the company many billions of pounds. It also faces huge interest payments on its nearly-£19bn worth of debt as the Bank of England hikes rates.

BT also faces huge revenues trouble in the near term as the UK economy flirts with recession. This is particularly dangerous given the highly-competitive market it operates in and the growing appetite of consumers to shop around.

So I’m happy to avoid BT shares and invest in other dividend stocks today.

This slump means that BT’s dividend yield has now risen to 5.7%. That’s well above the FTSE 100 average of 3.7%.

The only thing that’s stopped me from investing already is BT’s long-running lack of growth. However, I’m starting to think that the long-term potential of this business could be better than I thought. Here’s why.

A long-term bargain?

BT is currently spending around £5bn each year expanding its fibre and 5G networks. So far, this investment hasn’t delivered any obvious results. Revenue rose by just 1% during the first quarter of this year, while pre-tax profit dropped 10%.

However, CEO Philip Jansen says that by the end of the decade, BT should be generating an extra £1.5bn of surplus cash each year. This should be made possible by lower network spending and lower costs, as the company moves to an all-fibre network and switches off its copper network.

If BT can hit this cash flow target, it would double the group’s current surplus cash generation to £3bn per year. That could support higher dividends and a higher share price, in my view.

Tantalisingly, Mr Jansen says that BT has the potential to recover 200,000 tonnes of copper from its old phone network. That’s around £1.3bn worth of copper at current prices.

To be fair, Mr Jansen admits that the costs of this (big) operation are still being worked out. I wouldn’t get too excited. But it could be a nice little windfall.

Is the dividend safe?

One of my concerns about BT is that the group carries quite a lot of debt and has historically had a big pension deficit.

Servicing this debt and paying pension contributions will always take priority over dividends.

However, rising interest rates could change the picture slightly. Higher interest rates could help to reduce the pension deficit, as the income from BT’s pension assets will increase.

Unfortunately, rising borrowing costs might not be good news for companies that rely too heavily on debt. Although BT is a large, investment-grade borrower with reliable cash flows, my guess is that the interest rate on its debt is likely to creep up.

I don’t think BT will need to cut its dividend again. But I can see some risk that higher debt charges could limit the opportunity for dividend growth.

BT shares: what I’d do

I think CEO Philip Jansen is doing the right things. But BT is a mature business operating in a slow-growing market. Finding growth means adding new services or stealing customers from competitors. Neither of these things are easy or cheap.

On a long-term view, I can see some value in BT shares today. But the group’s big debt burden means that I’d like to see more evidence of progress before buying the shares.

BT shares look like an acceptable investment to me at the moment. But I think there are probably better choices elsewhere in the FTSE 100. I won’t be buying for now.

Should I follow the crowd and buy the FTSE 100 telecommunications stock for my own portfolio? Let’s discuss.

Why investors are piling into BT shares

I can see why BT shares are being snapped up by Hargreaves Lansdown investors right now.

For starters, after a big fall in the share price recently, the stock now looks dirt cheap. With City analysts expecting the company to post earnings per share of 20.9p this financial year (ending 31 March 2023), BT is sporting a forward-looking price-to-earnings (P/E) ratio of just 6.7 right now. That’s around half the median FTSE 100 P/E ratio of 13. So, there appears to be some value on offer here.

Secondly, there could be some big dividends on the cards. Last financial year, BT paid out dividends of 7.7p per share to its investors. And right now, analysts expect a payout of 7.8p for this financial year (dividends are never guaranteed). At the current share price of 139p, that equates to a yield of a very healthy 5.6%. That’s attractive in today’s choppy market, in which share price gains are hard to come by.

Finally, BT shares have received some favourable broker coverage recently. Last week, analysts at HSBC upgraded the stock from a ‘hold’ rating to a ‘buy’ rating. This is an encouraging development that could help improve sentiment towards the stock.

Is BT worth buying?

Having said all that, I struggle to get excited about this stock. Sure, it’s cheap, but I think that reflects the performance of the business.

In the company’s most recent trading update, for the three months to the end of June, BT posted revenue growth of just 1% year on year. Meanwhile, profit before tax was down 10%. Normalised free cash flow was -£205m versus -£43m a year earlier.

Looking ahead, analysts expect revenue for this financial year to be about 2% below last year’s figure. This lack of growth is an issue for me from an investment perspective.

Additionally, the company continues to have a huge pile of debt on its balance sheet. At the end of June, net debt stood at £18.9bn. This is an issue that can’t be ignored in the current environment. With interest rates rising rapidly, BT’s interest payments are likely to increase substantially. This could have a big impact on profits, and maybe even dividend payments going forward.

Looking at these numbers, there’s not much in the way of ‘quality’ here. So, a low valuation for the stock is probably quite appropriate, in my view.

Better stocks to buy

Given the lack of growth, and the mountain of debt, I’m happy to leave BT shares alone for now.

All things considered, I think there are better stocks to buy for my portfolio today.

The telecommunications giant is a FTSE 100 stalwart. And while it’s failed to excite for a while, I think its current price could be appealing. Here’s why.

BT share price history

Let’s start by assessing the performance of the stock.

Looking at the BT share price across the last five years isn’t pretty reading. Since then, its share price is down over 50%. The stock flirted with the 300p mark back then. Today, a share costs just 140p.

The last year has told a similar tale. In this time, it’s down 9%. And these losses have only continued in 2022.

The main reason for this is inflation. Rates going higher have seen investor confidence in the market go lower. While BT isn’t alone in its struggles as this year has seen a monumental amount wiped off global markets, it’s still not good news for shareholders.

On top of this, the business has also been in the news following staff strikes. The firm had been embroiled in discussions with the Communication Workers Union regarding calls for a pay rise amid the cost-of-living crisis. But BT’s offers haven’t satisfied the union.

Not all down and out

It’s clear to see BT has faced headwinds. However, I see potential with the stock.

Firstly, its dividend yield will most certainly come in handy during these times. For the year ended March 2022, its payout totalled 7.7p per share. At current levels, that equates to a 5.5% yield. And while it’s not inflation-beating, it offers me a greater hedge against inflation than the FTSE 100 average.

Another enticing factor is a potential takeover by French billionaire Patrick Drahi. He currently owns an 18% stake in the firm. And with the UK government providing Drahi an unexpected all-clear regarding his stake, this could open the door for a takeover attempt in the months ahead. This would provide the BT share price with a boost.

Of course, I don’t buy solely based on speculative factors such as a takeover that may or may not happen. You see, I also think there’s long-term value in the stock.

What I like about BT is the large infrastructure it already has in place. This provides it with some higher degree of pricing power. This was seen with raised prices for broadband and mobile contracts boosting its sales in the last quarter. With the continuous expansion of its Openreach network, which now reaches 8m homes and businesses across the UK, I think BT has solid foundations to excel.

My biggest concern is its debt. As of 30 June, its net debt stood at £18.9bn, which is a monumental sum. With interest rates rising, and with further hikes expected, this will make the debt harder to eradicate.

Is now the time?

So, is now a good time to load up on some shares?

I’d say yes. It’s been a tough year for BT. And I’d expect it to face further headwinds. While I have no spare cash right now, if I did I’d open a small position in the stock today. Its large infrastructure provides it with an edge. And its dividend yield and a potential takeover are also a draw.