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BT Group - the good, the less good and the fretful

By Chris Bailey | Thursday 10 May 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 concluded my last update on telecoms giant BT Group (BT.A) with the observation that:

'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'

Judging by today's share price dump alone, the latter point is unfortunately more hope still than reality. The reaction does look to me way too negative though, given the group's full year numbers were not a disaster. There was not any real growth but everyone knew that already and the full year dividend was held which means a 6.5%+ yield to investors. Even better - if you are not an employee - the confirmation of big job cuts (13,000); cost-cutting makes sense in today's world and is typically the thing that market watchers like. It is still progressing with the EE mobile phone integration, more super fast broadband and bundled offerings where the stickier and more loyal customers undoubtedly are.

That's certainly the good bits. The 'less good' undoubtedly centres on the confirmation, not really of the big £11.3 billion pension deficit, but the sheer need to continue chucking money into it. The most striking aspect to me was the confirmation of the hundreds of millions of quid per annum throughout the 2020s it is going to need to put in. The company describes this as 'manageable' and if I screw my eyes up and look at the mooted free cash flow levels it is possible to pay the dividend and the pension contributions after all other capex and internal obligations. And doing this in an evolving telecoms and related market is not going to be a cake walk. As the CEO - who surely the new Chairman is considering whether to keep or not - noted on the call: 'this really is a pivotal moment for BT'.

And the above has induced the third - and most influential - instinct today: 'the fretful'. Even BT on the call admitted that the UK telecoms market growth rate is 'slowing' and with regulation 'a continuing headwind', balancing everything is going to be really tricky and naturally that worries the dividend munchers because - frankly - you don't own BT Group shares for the dynamic internal potential. You hold it for a combination of dividend yield and a sensible share price valuation for the UK's leading telecoms name, not as a leveraged pension fund with a telecoms arm...and that's what all the headlines will be about today and tomorrow.

Would I hold/buy or fold here? Call me mad...but I think it is good value.

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