BT Group Plc’s Greatest Weaknesses

Two standout factors undermining an investment in BT Group plc (LON: BT.A)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When I think of fixed-line telecoms company BT Group (LSE: BT-A) (NYSE: BT.US), two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.

1) Debt

It’s a capital-intensive business building and maintaining a fixed-line telecommunications system, and that seems to show in the level of debt that BT carries. With the firm’s third-quarter results in January, net debts stood at £7,640 million, which is about 2.6 times the level of the previous year’s operating profit.

Given the nature of the firm’s activities and as companies go, that’s not an excessive amount of gearing, and BT has made good recent progress at reducing the ratio of net debt to operating profit, both by increasing its profit levels and reducing borrowings:

Should you invest £1,000 in The City Of London Investment Trust Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if The City Of London Investment Trust Plc made the list?

See the 6 stocks

Year to March 2009 2010 2011 2012 2013
Net debt 12,607 11,339 9,505 10,155 9,086
Operating profit 301 2,123 2,578 2,919 2,986
Debt divided by profit 42 5.3 3.7 3.5 3

However, I think debt is an area to keep an eye on with BT, as the comparisons to profit may not look as sweet in the depths of the next recession.

BT2) Cyclicality

The great beauty in BT’s business model is that its capital investment in fixed-line assets has potential to earn repeat-revenues for years to come. When consumers sign up for talk or broadband services, for example, they tend to remain for at least a few months. Changing our digital services provider is not something we do every week. Even if we spot a cheaper deal elsewhere, inertia keeps us rooted, so contracts tend to roll around and firms like BT enjoy a constant revenue stream.

However, longer term, BT’s revenue tends to be vulnerable to general economic cycles. We may not change our suppliers every week as consumers, but when times are tough business and residential revenue streams can decline. I think we can see that in the table where BT’s operating profit ramps up from low levels in 2009, when Britain was mired in recession.

What now?

City analysts following BT expect the firm’s earnings to grow by about 9% during the year ending March 2016. Meanwhile, the forward dividend yield is running at around 3.5%.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin does not own shares in BT Group.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Could the Tesla share price really fall to $120?

The Tesla share price has collapsed since Trump took office, and the news just keeps getting worse for Elon Musk’s…

Read more »

Investing Articles

2 UK stocks and funds to consider buying during this market downturn!

A diversified portfolio of UK stocks and other assets can deliver excellent long-term returns even after periods of severe volatility.

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

£10,000 invested in Alphabet stock 1 month ago is now worth…

Alphabet stock is a major casualty of Trump’s trade policy, with investors betting on reduced demand for advertising, among other…

Read more »

Investing Articles

Want a comfortable retirement? Here’s how much you need in your SIPP

The SIPP is a great vehicle for confident investors to build their personal pension over time and eventually use that…

Read more »

Investing For Beginners

3 ways I try to spot cheap shares during a stock market crash

Jon Smith talks through his process of filtering for cheap shares at a time when simply buying anything isn't the…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

As share trading hits new records, here’s why I’m planning to keep buying UK shares!

Thinking like Warren Buffett and buying 'on the dip' can unlock significant long-term returns from UK shares. Here's why.

Read more »

Elevated view over city of London skyline
Investing Articles

UK stocks: a brilliant buying opportunity?

UK stocks have taken a battering in recent days. That can be disconcerting -- but our writer is taking a…

Read more »

Bronze bull and bear figurines
Dividend Shares

2 dividend shares that could provide some shelter from the market storm

Jon Smith points out a couple of dividend shares that have yields in excess of 5% -- and that have…

Read more »