It’s been a mildly positive year for investors in BT (LSE: BT-A) (NYSE: BT.US), with the company’s share price increasing by 3% during 2014. This has outpaced the growth of the FTSE 100, which is flat over the same time period, but is perhaps a slight disappointment after all of the excitement surrounding BT’s foray into pay-tv rights. However, after an encouraging recent update, BT could prove to be a great long term play. Here’s why.
Upbeat Results
The key takeaway for investors from BT’s recent first-quarter results was that profit increased by 7% to £638 million on the back of revenue growth of 0.5%. This is very much in line with market expectations and means that BT is on track to deliver on its full-year expectations. Indeed, BT offers investors above-average growth prospects over the next couple of years, with the company due to increase earnings per share (EPS) by 4% this year and by 8% next year.
The Long Term
Furthermore, BT’s longer-term future also looks positive, with the company evolving into a major media player following its move into pay-tv. This is a market with huge potential for BT and it seems to be making the right moves so as to build a dominant position and take market share away from Sky. Indeed, a mark of its success can be seen in Sky’s acquisition of Sky Italia and Sky Deutschland, which appear to be direct responses to BT’s entry into the market, as Sky seeks to become bigger and more financially powerful.
Clearly, a bigger Sky could have more financial firepower with which to bid for sports rights. However, it is unlikely to be able to dominate on all fronts, with BT having the potential to at least grab a share of the lucrative market. This would allow the company to benefit from higher revenues and profits over the long run, as it consolidates its position via a wider range of sports offerings.
Attractive Valuation
As well as having growth potential, BT also offers good value at current levels. For instance, it currently trades on a price to earnings (P/E) ratio of 13.3, which is below the FTSE 100’s P/E of 13.8. In addition, BT’s yield of 3.2% may be less than the FTSE 100 yield of 3.5%, but has the potential to move much higher due to the company having a relatively low payout ratio of 43%. Therefore, it could still have appeal for income seeking investors in future.
BT appears to offer an appealing mix of growth potential and value. Certainly, the pay-tv market is going through a period of change, but BT seems to have the right strategy to benefit from this in the long run. As such, and with the potential for a fast-growing dividend, it could make a positive contribution to your mortgage repayments.
