Thinking of buying BT shares? Here’s what you need to know

BT Group plc (LON: BT.A) currently trades on a P/E of 8.6. Does that make it a ‘buy’?

| 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.

BT (LSE: BT.A) shares look cheap right now. The telecommunication giant’s share price has fallen all the way from around 500p in early 2016 to just 224p today, a decline of 55%, and at present the stock trades on a forward-looking P/E ratio of 8.6 and sports a gigantic dividend yield of 6.9%. However, if you’re considering buying BT shares because they look cheap, there are several things you need to know.

Revenue is declining

For starters, BT’s top line is expected to fall this year. For the year ended 31 March 2018, it generated revenue of £23,746m, down from £24,082m the previous year. This year, analysts expect sales to fall further, to £23,332m, representing a decline of nearly 2%. This downward trend in sales is not what you want to see as an investor.

Profits are falling

Similarly, earnings per share (EPS) are also expected to drop this year. Last time, the group generated EPS of 27.9p. However, this year, analysts expect EPS of 26.1, a decline of 6%, followed by a further fall to 25.6p next year. Again, the trend here is concerning.

Should you invest £1,000 in Shell 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 Shell made the list?

See the 6 stocks

Analyst downgrades

What’s even more worrying is that City analysts are still downgrading their earnings forecasts for BT. In the last month, analysts have downgraded their earnings estimates for this year by 0.19p per share. Over three months, consensus earnings estimates have fallen by 1.21p. That’s not good news for shareholders as earnings downgrades can hurt a company’s share price.

Debt is sky high

Investors also need to be aware that BT is carrying an awful lot of debt on its balance sheet right now, as well as a huge pension deficit, which adds considerable risk to the investment case. At the end of June, net debt was £11.2bn. Given that total equity on the group’s balance sheet was £10.3bn at 31 March, BT has a high debt-to-equity ratio. Interest coverage (EBIT divided by interest expense) was only six times last year, which doesn’t leave a huge margin of safety. Then there’s the pension deficit as well, which at 31 March was £11.3bn. It is going to require payments of £2.1bn over the three years to March 2020 and the issuance of more debt to reduce the deficit.

Dividend sustainability

Combine the group’s declining revenue and profits with the high levels of debt and the massive pension deficit, and the outlook for BT’s dividend looks uncertain. The fact that the yield is nearly 7% would suggest that many investors have their doubts about the sustainability of BT’s payout. Last year, the company held it steady at 15.4p per share, but will it be able to pay the same dividend this year with the extra pension payments that are required? Analysts are becoming more bearish on the group’s dividend prospects, with the consensus dividend estimate for this year having fallen by 0.7p per share over the last three months to 15.2p per share.

Conclusion

Weighing all of this up, the outlook for BT shares looks uncertain. They do look cheap at current levels, but investors should be aware of the risks.

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »