I’ve been bearish on BT (LSE: BT.A) shares for a number of years now. It’s been a good stance, because the share price has been on a downward trend since 2016. In fact, If I’d bought £1,000 of BT shares at the peak in 2016, my investment would only be worth £372 today. Ouch!
But things have been turning a corner recently. The share price has rallied almost 10% in 2022 alone. It’s up by a whopping 38% across the previous 12 months too.
I’m going to dig a bit deeper to see if I should buy BT shares today.
The bull case
I see the demand for ultra-fast telecommunications networks only expanding from here. Working from home has created a need for fast and reliable internet connections. Furthermore, with more entertainment coming from streaming services nowadays, people are willing to upgrade to higher data speeds with unlimited download quantities. BT is well positioned to take advantage of this increasing demand. Its Openreach division is rolling out full fibre broadband, which now stands at 6m households. The target is to reach 25m homes by 2026, showing the potential growth ahead.
BT’s 5G network now also covers 40% of the UK’s population. I see this as another exciting growth avenue for the company going forward as more people adopt the — much faster — 5G network.
Alongside the increasing sector demand, the company itself has been undergoing change. The CEO recently commented that it’s resulted in £1bn in cost savings. Promisingly, this was achieved a whole 18 months ahead of schedule. He said it’s “all part of creating a leaner BT with simplified processes and improved customer experiences.”
BT was able to reinstate its dividend in the recent half-year results to 30 September too, so its financial performance is clearly improving.
The bear case
The first risk I see in the business is its heavy debt load. According to the latest filings for the half-year results, net debt on the balance sheet was £18.2bn. This is significant considering the company’s market value is only £18.5bn. With the prospect of rising interest rates, it’ll likely mean interest costs will rise, too. Any potential dividend payments may then decline.
Having said this, BT did confirm that all of the major debt ratings agencies confirmed an investment grade score for the company. This means there isn’t any impending risk of insolvency.
The growth forecasts for fiscal year 2023 (the 12 months to 31 March 2023) aren’t the most exciting either. City analysts expect revenue to stay broadly flat, while earnings are forecast to grow by almost 5%. The valuation on a price-to-earnings (P/E) basis has already risen from a lowly 5 in 2020, to a forward P/E of 10 today as well.
So, with tepid earnings forecast, and a doubling in the valuation recently, I don’t see BT surging much higher from here.
Should I buy BT shares?
There are some promising signs at BT. The cost savings strategy is being executed very well, and I like the sector tailwinds that the company should be able to capitalise on. Although I don’t think the share price will carry on surging at its current rate, there should still be some upside in the shares. The prospect of a 4% dividend yield today is also attractive for my income portfolio. So, on balance, I’d consider buying BT shares today.
