2022 has been a tough year for stock markets. Rampant inflation has led central banks to hike interest rates, and as a consequence stocks are taking a hit. For context, the FTSE 100 and S&P 500 are down 6% and 23% year to date, respectively.
However, there are some stocks that have weathered the storm of this year’s market volatility. BT (LSE: BT-A) stock is up 4% this year, rising 9% in the past six months. Granted, the shares are down 10% over the past 12 months, but with the recent positive move, is this stock a no-brainer buy?
A great buy
One of the primary reasons I like the look of BT is due to its ‘defensive’ nature. The company has a huge amount of pre-existing infrastructure, meaning it has little operating cost exposure. In addition to this, the firm’s strong customer base gives it — up to a point — good pricing power, meaning it can move prices in line with inflation. Both of these factors should help BT stay afloat in today’s volatile markets.
The Q4 2022 results released in May also contained some good signs. The firm delivered on its main strategic priorities, with its 5G network now covering around 50% of the UK. In addition to this, its ultrafast Openreach broadband was rolled out to an additional 3m homes, now totaling 7.2m across the UK. Finally, FY2023 free cash flow predictions were adjusted from £1.3bn to £1.5bn, showing the strong cash generation of the telecoms giant. This should ensure a stable dividend for the foreseeable future.
Looking at BT’s valuation fills me with even more confidence. The shares currently trade on a forward price to earnings (P/E) ratio of 9.1. This is below the P/E ‘value’ marker of 10. In addition to this, it looks much cheaper than competitor Vodafone that trades on a forward P/E ratio of 14.8. BT also offers a healthy dividend yield of 4.3%, which could top up my portfolio with extra cash.
Not plain sailing just yet
One risk I see for BT in the near future is the cost of living crisis. Yes, it has the luxury of moving its prices in line with inflation, but customers can only be pushed so far. They do have other options and if prices rise too much, they could move. It operates with wafer-thin margins so any substantial loss of customers could pose a big threat.
In addition to this, BT’s balance sheet is stacked with over £20bn in debt. As interest rates creep up, this figure could slowly rise, putting pressure on the business. However, BT’s cash positive cash flow projections signify that this debt isn’t an immediate risk.
A no-brainer buy?
I have a soft spot for BT stock in the current market, however, I wouldn’t go as far as calling it a no-brainer just yet. I think the stock could perform well over the next few years, and also provide me with a good inflation hedge. However, I think wider market volatility could dent the share price in the near future. As such, I’m going to wait until BT’s July results before making my move.
