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BT Group - what price no growth, a 6% dividend and unchanged forecasts?

By Chris Bailey | Friday 2 February 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


I had a bit of a rant yesterday about three FTSE-100 behemoths that were dividend-heavy but consensus buys and not offering - in my opinion - value. I don't think BT Group (BT.A) is in this grouping however despite being dividend-heavy and suffering a falling share price today because basically it is very out-of-favour.

It is easy to dislike BT. It has hacked off regulators and escaped a formal Openreach spin-off by the skin of its teeth, it has a big pension deficit where it still remains in discussions, it uncovered a big Italian fraud in the last year or so which correctly questioned its internal controls and it has not seemed to have made the most yet of its move back into mobile with the purchase of EE. And can BT Sport be anything more than a cost centre? As the CEO said on the conference call earlier:

'There are headwinds across the business as customers move from fixed lines, headwinds from changing market conditions...and regulatory headwinds...but offset against this...we can create converge services for business and private customers'

In a nutshell, that quote captures the current debate around BT Group. The metrics today were generally negative with fiscal Q3 revenues and ebitda both down 2%. And pacing through all the divisions there was not much relief with even the EE unit seeing falling profit as the company had 'high customer investment costs'. Subsidise your iPhone anyone?

At least it did not cut its full year (to the end of March) forecasts - which put the company on a low earnings multiple and a c. 10% free cash flow yield. Well the latter is heavy enough to cover the current 6% dividend and even try to chivvy down the £10 billion of industrial debt and make a contribution to keep the large pension deficit under control. On the call though you could hear the fears re. where the 2019 numbers may land from the professional analyst community.

This is a complex business in the middle of a lot of change. It recently has acquired a new Chairman who helped lick Rio Tinto (RIO) into shape and it is deep in 'constructive discussions' with its pension fund as it tries to get this under more control (good job bond yields are rising then!). I would say no growth but more of a balance towards tomorrow's earners (converged broadband, mobile, pay-TV offerings etc.) and a calmer regulatory/pension backdrop (which would not be difficult) is a story which equates to a three quid share price. Driven by the new Chair that is actually very do-able, not that it is particularly clear today...so you have to believe but judging by that combination of numbers, fear and uncertainty I can make that work. Additionally - and rightly – it is still committed to a progressive dividend too.

Goodness that last comment means I am sounding like the 'yield munchers' I criticised yesterday...well so be it. I would be a buyer of BT Group today.


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