After languishing around 100p throughout the majority of 2020, the BT (LSE: BT.A) share price surged above 200p in June. Unfortunately, the stock struggled to hold onto these gains. Between the end of June and the end of October, it lost 30% of its value.
However, following a string of positive updates, the stock is now pushing higher once again. I think this could be the start of a sustainable move higher to 200p, and above.
The BT share price rally
There are four reasons why I think investors have been buying back into BT over the past few weeks. First of all, in May, French billionaire and Altice owner Drahi became a 12.1% shareholder.
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At the time, the investor said he would not use his stake to launch a takeover of the business. After making this statement, he cannot go back on his word for six months, under market rules. That limitation expires in the next few weeks.
In addition, at the beginning of October, BT’s pension scheme published its annual report. It suggested that the overall scheme deficit had fallen to £4.6bn in June, an improvement of roughly £3.4bn.
BT’s capital spending plans are also coming in lower than projected. In a recent update, the group said it will now peak at £4.8bn a year, compared to initial projections of £5bn. Lower costs mean the corporation is also mothballing plans to find a partner to help meet its fibre broadband ambitions.
And, finally, management plans to bring BT’s dividend back again after an 18-month hiatus.
These developments all suggest to me that the telecoms giant is heading in the right direction. While it faces several years of heavy capital spending, which will likely restrict investor returns, the expenditure should ultimately pay off in the long run. Indeed, BT is already registering solid sales related to the new fibre connections it has rolled out.
Overcoming the challenges
Still, there are some significant additional challenges the group faces. These include its mountainous debt pile and pension deficit. Although the deficit has declined over the past 12 months, at £3.4bn, it is equivalent to more than two years of net profits.
The company is also facing increasing competition from the likes of City Fibre, which is investing billions in developing its own fibre broadband network. In the UK’s highly competitive telecommunications market, BT needs to stay on its toes to fend off these challenges.
Despite these risks, I think the stock can continue to push higher. As earnings growth returns and the company prepares to reinstate its dividend, I believe the BT share price can return to 200p.
If the group’s fibre broadband push continues to beat expectations, I think the stock could even push above this level. Rising profits and falling spending will free up more cash to strengthen the balance sheet and return to investors.
