BT (LSE: BT.A) shares have experienced a significant decline recently. Year to date, they’re down about 33%. Could they be a good buy for my portfolio for 2023? Or are there better stocks to snap up for next year? Let’s discuss.
Value on offer
From a ‘value’ investing perspective, BT shares do look interesting right now. Currently, analysts expect the telecoms company to generate earnings per share of 21p for the year ending 31 March 2023.
This means that at the current share price of 114, the forward-looking price-to-earnings (P/E) ratio is under six. That’s a low valuation. It’s less than half the median FTSE 100 P/E ratio.
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Income appeal
Meanwhile, the shares also look interesting from an ‘income’ investing perspective.
Last financial year, BT paid out dividends of 7.7p per share to shareholders. Currently, analysts expect a 7.77p payout for this financial year, but I reckon another payment of 7.7p is probably on the cards as the company held its H1 dividend flat at 2.31p per share.
At the current share price, a 7.7p per share dividend payout equates to a yield of about 6.8%. That’s attractive in today’s choppy market.
Would Warren Buffett buy BT shares?
The thing is though, I’m more of a ‘quality’ investor these days. I like to invest in high-quality, ‘Warren Buffett’-type businesses that are growing at a healthy rate, highly profitable, and have strong balance sheets. These kinds of companies tend to produce good returns for investors over the long term.
Now, on the quality front, BT is lacking a little. For a start, the company is hardly growing. For the six months to 30 September, revenue was up just 1%. And for the year ending 31 March, analysts expect revenue to decline year on year.
Secondly, BT is not very profitable. Over the last two years, return on capital employed (ROCE) has averaged just 6%.
This reminds me of a quote from Buffett’s business partner Charlie Munger: “If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much different than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
It’s worth noting here that profitability may decline going forward due to rising costs. In its recent H1 results, BT said: “We face a challenging external environment, including significantly higher energy costs and inflation than previously envisaged.”
Additionally, BT’s balance sheet is quite weak. At the end of September, the company had net debt of £19bn on its books. This could be problematic now that interest rates are much higher. Higher interest payments could jeopardise the dividend.
My move now
Given the lack of growth, the low level of profitability, and the high debt levels, I don’t see BT as a good fit for my portfolio as we approach 2023. The stock is cheap. But all things considered, I think there are better stocks I could buy.
