Over the past few months, the BT (LSE: BT.A) share price has surged in value. Since the beginning of November, the stock is up around 30%.
However, even after this outstanding performance, the stock still appears undervalued, in my opinion.
BT share price on offer
I’ll admit I’ve not always been overly optimistic about BT’s future. I think the company has far too much debt, a terrible reputation with customers, and has failed to invest sufficiently in its future over recent years.
Although the debt problem remains, I think BT is working to rectify the other factors. For example, its Openreach division recently announced it was accelerating the roll-out of its gigabit-capable full-fibre broadband across much of the UK. The goal is to connect 20m households and firms to the network within the next 10 years.
This £12bn commitment shows the group is serious about investing more in its infrastructure. Openreach and BT’s operating business are technically different entities. Nevertheless, there’s a great deal of overlap between the two. Increased connectivity between them should also lead to improved customer service.
I think this commitment shows the business is finally starting to get to grips with its problems, rather than kicking the can down the road. That’s the main reason why I’ve turned optimistic on the BT share price.
Growth on the horizon
Since 2015, BT’s sales have increased at an average annual rate of 5%. However, profit has declined by 10% on average every year. The company has had to spend more to retain customers, and declining profits have harmed the BT share price.
But now the corporation is starting to invest more, I think it’s likely customers will start to return to the brand. That could lead to increased profit margins and higher profits.
While it could take some time for these changes to start yielding results, historically, BT has been a FTSE 100 dividend champion. The company cancelled its dividend in 2020, due to the uncertainty of the pandemic. But the distribution is expected to return shortly. Analysts forecast a dividend yield of 5.4% on the current share price.
These figures suggest investors will be paid to wait for the turnaround. That’s not the only benefit I see to buying the BT share price at current levels. It also looks dirt cheap. The stock is trading at a forward price-to-earnings (P/E) multiple of just 7. That’s around 30% below the company’s long-term average.
As such, I think BT shares could generate high total returns for investors in the years ahead when owned as part of a diversified portfolio. The combination of the company’s low valuation, market-beating dividend yield and investment in growth could drive the shares significantly higher in the long term, even after the stock’s recent performance.
