BT (LSE: BT-A) shares have proved to be a great investment so far in 2022. They’re up 12% year to date, and 3% over the last 12 months. With markets looking increasingly uncertain, and the threat of recession looming, I think BT could be a great stock market play for me. Let’s take a look at why.
Valuing BT shares
Digging into BT shares’ value, I see a lot of positives. The company is super-asset-rich, which has provided a great hedge against inflation this year. Judging by BT’s most recent report, the value of its assets comes to just under £9bn. There are currently just under 10bn shares outstanding. Dividing these two numbers shows me that the value of BT’s assets adds up to around 90p of the share price. So in one way, I could say that if I buy BT at 193p, I’m buying it for 103p.
Judging the share price at this hypothetical 103p, the BT price-to-earnings (P/E) ratio falls to just 7.9 (almost half the current P/E ratio of 15). Comparing this to competitor Vodafone that currently trades on a P/E ratio of 21, I see huge value. Also, the current dividend yield is 4%, which could add a healthy passive income to my portfolio.
As mentioned above, BT’s abundance of infrastructure has helped it weather the storm of rising inflation. This is because having large amounts of pre-existing infrastructure means that operating cost exposure remains low. BT’s well-established customer base also helps it alter its prices in line with inflation, which can mitigate the risk.
The Q4 2022 results gave me confidence. The telecoms giant delivered on all of its strategic priorities with its 5G network now covering over 50% of the UK, and its Openreach ultrafast broadband now being installed in over 7m homes. This highlights to me the firm’s dominance in the sector.
A risky investment?
It’s not all perfect, of course. The biggest risk I see for BT is that it has over £20bn in debt on its balance sheet. Interest rates have been rising in order to keep inflation under control, and these rising rates could magnify BT’s debts. That being said, the firm announced that it expects free cash flow to rise by over £200m in 2023. This should help mitigate the risk of rising debt repayments.
The cost-of-living crisis could also place big pressure on BT shares. If it increases its prices too quickly, then it could force customers to turn to cheaper alternatives. It operates with a low 7% profit margin, so a substantial loss of customers would place big pressure on the firm’s profitability.
The verdict
Overall, I think BT stock offers me good value at the current share price. The healthy dividend and encouraging results reaffirm the strong investment case. Personally, I think that these positives outweigh the current risks, and hence I’m looking at adding a BT position to my portfolio in the near future.
