Though the BT Group (LSE: BT.A) share price fell 35% over the past 12 months, it’s made a buoyant start to 2023. And with a Q3 update due on 2 February, investors haven’t really missed any potential recovery yet.
What can we expect from BT this year, and is it one for dividend investors to buy now? Forecasts suggest a steady couple of years, with the dividend yield stable at around 6%. They put the stock on a price-to-earnings (P/E) ratio of under eight, which is well below the FTSE 100 average.
Positive
BT is investing considerable sums in expanding its network rollout. And considering the growing supply-side costs globally, I think those forecasts look positive to me.
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At the halfway stage, the company said it was “on track in delivering our strategy despite short-term macroeconomic pressures“. Fibre broadband rollout was reaching 62,000 premises per week in the second quarter. And the EE 5G network had reached “nearly all UK major towns and cities“.
On the content delivery front, BT’s sport offerings are looking good. At least, they appear to be popular with people who watch sport.
Low valuation
So why are BT shares so lowly valued when the dividend looks so strong? Why are investors not rushing to buy, and pushing the price up?
I suspect it’s largely for the same reason I won’t buy. I don’t think they’re undervalued, I just think they reflect some downsides that lie behind the headlines. And it all comes down, essentially, to debt.
At 30 September 2022, BT’s net debt stood at a whopping £19bn. That was £800m worse than the same point a year previously. And to put it into some perspective, it’s 1.4 times the company’s total market cap at the time of writing.
Debt reduction?
Normalised free cash flow had slumped by 80%, though that is expected to improve considerably by the end of the year. Hopefully we’ll get an update on the cash situation in the third-quarter update.
Chief executive Philip Jansen said: “We continue to drive ahead with our strategy designed to deliver consistent and predictable revenue and EBITDA growth, expand cash flow and underpin our progressive dividend policy over the longer-term.“
There was nothing about targeting debt reduction, though. From BT, it seems we just get a relentless focus on paying the dividends. But a debt pile that massive must surely put the dividend under pressure, mustn’t it?
Wrong again?
Despite my lack of enthusiasm, I suspect BT could prove me wrong again. I keep on thinking the dividend is too rich for the available cash, but BT keeps on paying it. The cash paid out probably doesn’t look too demanding compared to revenues and capital expenditure.
The pandemic also gave BT what I think might have been a handy backdoor opportunity to reset its dividend. Last year’s came in at half of pre-Covid levels. And the company was able to just appear cautious without having to reverse its long-term dividend policy.
But I just can’t bring myself to buy into a company with so much debt.
