2 big risks to BT’s share price

BT shares look cheap right now and could rise if value stocks remain in focus. But there are risks that could hit the share price, says Ed Sheldon.

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BT (LSE: BT.A) shares are popular with UK investors and I can understand why. A well-established FTSE 100 company, BT is a household name. And after a big share price fall over the last few years, the stock now looks quite cheap.

Yet looking at the investment case for BT, I see a couple of big risks. I think these could potentially limit share price upside in the years ahead. Here’s a look at what concerns me.

BT’s massive debt pile is a risk

The first thing that worries me here is the amount of debt on the company’s balance sheet. At the end of September, the group had net debt of £18.2bn. By contrast, total equity on the balance sheet was £12.1bn.

This mountain of debt is an issue for me due to the fact that interest rates are now rising. With these going up, the debt is going to become more expensive to service. This is going to impact profitability, and potentially dividend payments.

It could also impact the share price. For the six months to 30 September 2021, BT paid out interest of £396m. I’ll be keeping a close eye on the company’s interest expense going forward.

Less cash flow for dividends

Another risk is in relation to capital expenditures (capex). Right now, BT is forking out a ton of cash to upgrade its network. In the first half of its financial year, capex amounted to £2.6bn. For the full year FY2022 (ended 31 March), it was expecting capex to come in at around £4.9bn.

The good news here is that the company thinks it’s pretty close to ‘peak capex’, and expects spending to come down in the years ahead. This could boost free cash flow. However, my concern is that BT will have to keep shelling out cash going forward to keep its network up to date. This could limit earnings growth and mean less cash flow for dividend payments.

BT shares do look cheap

Of course, there are some things to like about BT shares today. As I mentioned earlier, the stock looks quite cheap right now. At present, its price-to-earnings ratio (P/E) is just 9.3. So it could attract attention from value investors.

It could even attract a takeover offer. Recently, French-Moroccan billionaire Patrick Drahi built up an 18% stake in the company. Some believe he may be interested in making an approach for the company in the near future.

BT is also set to ramp up its dividend payments after paying no dividend in FY2021. For FY2022, it plans to pay out 7.7p, which equates to a yield of about 4% at the current share price.

However, given the risks in relation to debt and capex, I won’t be buying BT shares for my own portfolio right now. All things considered, I think there are better UK shares to buy today.

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.

Edward Sheldon has no position in any of the shares mentioned. 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.

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