BT Group (LSE: BT-A) shares have had a good run in recent months, rising by 40% from their 52-week low of 135p, to nearly 200p.
I’ve missed out on this recovery so far, but BT shares still look affordable to me. I’m wondering whether the UK’s biggest broadband and mobile provider could finally be back on track for a return to growth.
What are BT’s problems?
Since taking charge in 2019, CEO Philip Jansen has been trying to solve problems that have seen BT’s pre-tax profit fall to £1,963m from £2,354m in 2017.
The issues are simple enough to understand. In a mature market like the UK, it’s hard to find new customers. Almost everyone already has broadband and a mobile, so winning new business means taking a customer from another operator.
Tough competition means that BT can’t increase prices too much. But customers keep using more data and demanding faster services.
To meet this demand, BT has to keep spending on network upgrades — £5.3bn last year. Cash is also needed to service the group’s £18bn debt mountain and fund pension deficit payments.
Can BT shares return to 300p?
As a dividend investor, I’m interested in BT because I think the company’s business should provide a reliable supply of dividend cash that grows steadily over time.
Unfortunately, the reality has been different over the last few years. Jansen suspended the dividend in 2020/21, before reinstating it with a 50% cut last year.
I think this cut was the right choice, but in my view, it could make it more difficult for BT’s share price to return to 300p.
BT shares traded at this level in 2017, but back then the company reported earnings of 28.9p per share, supporting a 15.4p dividend. That gave the stock an attractive 2017 yield of 5.1% at 300p.
Today, broker forecasts suggest BT’s earnings could rise by 3.5% to 21p per share this year. That’s expected to support a dividend of 7.8p per share.
Based on this payout, BT shares would only offer a dividend yield of 2.6% at 300p. That’s too low to interest me, given BT’s low growth rate.
I could be wrong – BT could be cheap
One problem with relying on broker forecasts to value stocks is that these estimates tend to assume that the future will be similar to the recent past.
When a company manages to deliver a genuine performance improvement, analysts are often caught by surprise. That’s when share prices can surge higher.
I think this could happen with BT. Jansen has made a range of changes that haven’t yet shown their full potential. These include significant cost savings, plus an expansion of BT’s fibre and 5G networks.
Rising interest rates could also help by eliminating BT’s pension deficit. This shortfall fell from £5.1bn to £1.1bn last year, partly due to rising interest rates.
Cutting the pension deficit could free up cash for debt reduction or dividends. Both of these could help to justify a higher share price.
As things stand today, BT shares trade on around nine times forecast earnings, with a 4% dividend yield. Although I don’t expect a return to 300p in the near future, I think the shares look fairly priced and would consider buying them today.
