Friday saw the release of Q1 results for BT (LSE: BT.A). The company’s share price declined by around 2% on the day of release, which means the stock is now down by over 15% since the start of the year. Unfortunately, the results included yet more negative news regarding regulatory/legal issues, although the overall performance of the business continues to be relatively robust. With this in mind, is now the right time to buy the company? Or, are more share price falls ahead?
Challenges
BT was forced to pay £225m so as to avoid a court battle with Deutsche Telekom and Orange regarding the accounting issues it has faced in Italy. The two mobile operators had accepted shares in part-payment for their shareholdings in EE, which was recently acquired by BT. However, the value of their stakes in BT had fallen dramatically earlier this year following the difficulties faced in Italy. This meant that legal action was possible, with the £225m payment heading that off.
There have also been further changes in senior personnel at the company, as BT continues to engage in a major restructuring. The head of its consumer business, John Petter, will leave the company as the segment will now merge with EE. This is part of an overall plan to simplify the firm after a number of major changes to its operations and the services it offers. In the short run at least, such changes have the potential to create more uncertainty and instability surrounding financial prospects.
Improving outlook?
Despite its challenges, BT was able to post some encouraging figures for the first quarter. For example, its Mobile segment was able to increase its number of subscribers by 210,000. A churn rate of 1.1% is relatively impressive at a time when competition within the quad-play market continues to increase. Furthermore, it remains a dominant player within a number of key markets, including retail broadband where its net additions represented a 53% market share.
In addition, the company is quickly becoming a more enticing income stock. It currently yields around 4.9% from a dividend which is covered 1.9 times by profit. This suggests it could afford to pay out a higher proportion of earnings to shareholders, thereby helping its investors to beat inflation over the medium term.
Looking ahead
While there are some positives in BT’s first quarter results, the company remains locked in a period of significant change and uncertainty. It is seeking to fundamentally change its structure and business model while experiencing difficulties in its Italian division, as well as a general slowdown in the broadband market. Alongside a troublesome pension liability and major reshuffles in its management team, this is inevitably creating nervousness among investors.
This situation looks set to continue over the medium term. As such, the company’s share price could fall further, and it seems to be a stock to avoid at the present time.
