The BT (LSE: BT-A) share price ended last week at a new multi-year low of 155p. The FTSE 100 firm has maintained a dividend of 15.4p in recent years, so as the share price has slumped, so the dividend yield has risen. It’s now a gnat’s whisker shy of 10%.
Investors are showing little interest in the stock’s bargain-basement valuation of 6.7 times forecast 23.2p earnings (for the year to 31 March). Meanwhile, that super-high 10% running yield on the 15.4p dividend suggests the market’s convinced the payout will be cut.
Is it game over for BT? Should investors run for the hills? Or could the stock be one of the best recovery bets in the market today?
Competitive advantages
Competition in the telecoms sector is pretty fierce. However, I think BT has some competitive advantages. It has a strong position in the infrastructure of both fixed-line and wireless networks. This gives it a significant degree of control over the upgrade schedules across the networks. As such, I believe the business is attractive for investors. In principle, at least.
Investment for growth
BT’s current management has the right experience and strategy to take the business forward, in my view. Chairman Jan du Plessis previously helped restructure mining giant Rio Tinto when commodity prices slumped last decade. Chief executive Philip Jansen joined BT little more than a year ago. Previously, he steered change and investment for growth at payment processing group Worldpay.
Debt
The biggest issue, I think, is whether Jansen is able to allocate sufficient capital for growth and maintain the dividend at the current level. The payout to shareholders costs about £1bn a year.
BT’s balance sheet isn’t the strongest. At the last half-year-end (30 September), net debt stood at £18.3bn versus shareholders’ equity of £10.3bn. This gives net gearing (net debt divided by shareholders’ equity multiplied by 100) of 178%.
The gearing is high. Having said that, GlaxoSmithKline, for example, has come through a period of even higher gearing, while maintaining its dividend. Can BT do the same?
Dividend
The company has some things in its favour on the debt front. The majority of its term debt matures beyond 2026. Meanwhile, the three big credit rating agencies rate its ability to repay its short-term debt as ‘satisfactory’ — a notch below ‘superior’ and a notch above ‘adequate’.
Nevertheless — like a number of City analysts — I believe BT will rebase its dividend. If not this year, then next.
The company said in its recent Q3 results that the government’s limiting of Huawei equipment in UK networks will cost it £500m over the next five years. This, together with the need for business investment (including a potential acceleration of fibre-to-the-premises investment), has firmed my belief a dividend rebasing is in store. And I actually think this would be sensible.
Strong risk-reward opportunity
In my view, if the rebasing scenario isn’t already priced-in by the market at the current 155p share price, it’s pretty close to it. I wouldn’t want too many recovery bets in a portfolio, but I reckon BT is one of the stronger risk-reward opportunities around. As such, I rate the stock a ‘buy’.
