I believe it’s been helped by it being key to the Government’s pledge to deliver superfast broadband to every home and businesses across the country by 2025.
I could buy the FTSE 100 as a solid defensive income addition for my portfolio. But I want shares that can offer me long-term growth and, I don’t think BT makes the cut. Here’s why.
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Does the BT share price have room for growth?
My approach to stock-picking is centred on finding undervalued companies that can appreciate in price over the long term.
As such, I’m on the hunt for stocks with strong fundamentals and growth potential over the next business cycle.
Does that include BT? Regarding its share price valuation, the price-to-earnings ratio of 14x is above its peer average (13.4x) . So, I can’t say this stock is undervalued – but I wouldn’t call it expensive either.
Particularly significant for me is that its forecast annual earnings growth (4.3%) is lower than its peer, Vodafone (5.4%).
So, although some growth is forecast by analysts, I don’t expect the company to be an outperformer. This would clearly hold back potential growth in BT’s share price.
Additionally, the stock is nearing the highs it reached before the pandemic, which I think suggests the market has already priced in any potential growth.
Dividend policy could dent the share price
I like to use a measure called Return on Capital Employed (ROCE) to evaluate a company’s profitability. This approach measures the amount of pre-tax profits a company can generate from the capital employed in its business. BT’s ROCE is 7.7%. I think that’s a low return and it underperforms the telecoms industry average of 10%. In fact, its ROCE has fallen from 13% over the last five years.
I think this is partly due to its relatively high dividend yield. That may look attractive to some, but for a growth investor like me, it doesn’t. That’s particularly so as its dividend cover is low and the payout eats up the majority of its profits. I believe this will continue to dent returns in the medium term, as well as depressing BT’s share price.
Defensive share for income, not growth
Finding a business that has the potential to grow substantially isn’t easy.
When I’m trying to spot such companies, a growing ROCE is usually a positive indication that the share price will grow with it. BT doesn’t seem to be in this group. The ROCE has been declining, over the last five years, and so has the share price, which has fallen around 20%, despite its more recent resilience.
To answer my question in the title, no, I don’t think the share price is cheap.
But will I buy? I see BT as a defensive stock that could give me a competitive income. But that’s not enough to win a place in my stocks and shares ISA portfolio. Its long-term upside is too limited for me.
