BT Group (LSE: BT-A) released full-year figures earlier this month which belie its share price.
The telecoms giant reported “a solid set of financial results in the fourth quarter“, with reported pre-tax profit up 11%. The adjusted figure was down 2%, but I don’t see that as too bad, and basic EPS rose by 7%.
The dividend, at 15.4p, yielded 7% on a share price of 220p on the day. But the yield is only that high as a result of BT’s share price slump — since a high in November 2015, its shares have shed 56% of their value, while the FTSE 100 has gained 23%.
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And that crash has left BT shares floundering on P/E levels of only eight, way below the FTSE 100’s long-term average of around 14. So why do investors shun BT so fiercely?
Debt and deficit
An important clue lies in the company’s debt position, with net debt standing at £9.6bn at 31 March — up by £695m since the same time a year ago. Now, that’s only around 1.3 times the firm’s net EBITDA of £7.5bn for the year, and on that score alone is perhaps not too stretching.
But that’s not BT’s only big liability. There’s the millstone of a £11.3bn pension deficit still hanging around its neck. That deficit, added to net debt, comes to £20.9bn, which is marginally higher than BT’s market-cap of £20.5bn.
That suggests an effective P/E multiple for the business itself, with the debt and deficit excluded, of around 16. The question now is whether that’s a sensible valuation. And if BT’s plans to get its debt down and address the pension fund problem prove effective, I think it could be.
Can we fix it?
Key to those plans is the intended shedding of 13,000 jobs over the next three years, mainly in back office and middle-management roles. There are going to be around 6,000 new hires “to support network deployment and customer service” which would annul some of that saving. But the company is aiming for “a year 3 cash cost reduction of £1.5 billion with costs to achieve of £800 million and two-year payback.“
On the pension front, the recent triennial valuation saw the deficit rise to that £11.3bn level, though that was apparently mostly due to falls in long-term real interest rates. And, in line with the remaining period of the previous plan to attack this huge sum, BT is expecting to be able to address it over the next 13 years. Yes, we’re talking long term, but there are no shortcuts here.
BT will pay £2.1bn over the three years to March 2020, with £850m already paid in March. And there’s going to be a further £2bn raised from issuing bonds with maturities from 2033 to 2042 — I’ve mixed feelings about that, as it’s more long-term debt.
Then from 2020 to 2030, the firm should be making payments of around £900m per year.
One thing I don’t like to see is companies handing out big dividends while building up debt, as that’s really nothing more than borrowing money to hand to shareholders. And while big debt remains the key factor at BT, I can see its shares continuing to languish.
But if you genuinely have a long-term perspective, I still see good value here.
