At 180p, is the BT share price cheap?

The BT share price has had a couple of good years, but is there any long-term upside for a growth-oriented investor like me?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

BT Group‘s (LSE: BT-A) share price has been resilient over the last couple of years. That’s no mean feat amid the pandemic and, more recently, the cost of living crisis. Aside from a significant dip in March 2022, its share price has been generally edging higher.

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.

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.

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.

Henry Adefope 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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »