What could suspending its dividend mean for the BT share price?

In the search for cash, is the dividend cut decision a good move for BT shares?

| 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.

Earlier this month, BT (LSE: BT.A) announced it would be suspending its dividend for the first time since its privatisation in 1984. I couldn’t help but have mixed feelings about this. As a BT shareholder, its dividend was one of the things that attracted me in the first place.

However, one of the first investing lessons I remember learning is that sometimes cash should be reinvested (or saved) and not redistributed to shareholders. Dividends are great, but not always in the best interest of the company. I am hoping that for BT, this is the case.

Faster broadband

The saving is being made as the company intends to invest in its full-fibre broadband network. BT intends to connect 20m homes and businesses to the broadband network within a decade. The company is also conscious of maintaining its credit rating – an area that has caused trouble in the past.

Officially, BT said it would suspend its final dividend for the year to March and said there will be no investor payout in the current financial year, expecting to save the company £2.5bn.

Dividends are expected to be reintroduced in the next financial year, but at a much lower 7.7p per share (vs. 15.4p in its previous final dividend). To be fair, this still translates to a healthy 5%–6% yield at its current price. But I do have other concerns.

Pros and cons

In addition to its dividend, a major factor behind my decision to invest in BT was that I felt it was oversold on weaker earnings numbers. I believe it will be able to save decent amounts of money in the coming years as it is able to let go of large amounts of overhead.

However, I am now starting to worry that this may not be enough. One of my own investing rules is to avoid, for the most part, sectors that see large government interference. BT has been an exception to this rule for me. BT is expanding its broadband network in large part due to government pressure. Competition rules means it is forced to share and allow access to its network to rivals.

BT Openreach

One saving grace that has me holding on to my BT stock is that the company is apparently in talks to sell off its Openreach division – its most profitable arm. Openreach, a separate entity within BT, could be expected to raise decent levels of cash for the company.

Hopefully this will bring about a nice bounce in the share price. Personally, it is that kind of jump that I will probably be on the look for as a selling opportunity.

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.

Karl has shares in BT. 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

Investing Articles

Here’s how a Stocks and Shares ISA and Lifetime ISA could supercharge my wealth!

Individual Savings Accounts (ISAs) can help UK share investors take their earnings to the next level. And their importance is…

Read more »

A person holding onto a fan of twenty pound notes
Investing Articles

A high-yield dividend ETF and an investment trust to consider this November!

Investors wanting to boost their passive income could benefit from investigating these high-yield funds and trusts, says Royston Wild.

Read more »

Investing Articles

2 of my favourite, cheap FTSE 100 growth shares this November!

These FTSE 100 growth shares could be great long-term picks to consider, reckons Royston Wild. At current prices he thinks…

Read more »

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »