The BT (LSE:BT.A) share price has fallen 9.8% since the start of the year. It’s been an inauspicious start to a new year. The telecoms giant is now down 14.8% over the past 12 months.
Shareholders will undoubtedly be hoping for a Rolls-Royce-style recovery. But is it on the cards?
Personally, I don’t think so. While BT might look cheap on the surface, it’s got a huge debt burden, and growth is slow — very slow. There’s no compelling reason I’d want to buy this stock.
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Here’s why I’m not buying BT, even after the price dipped.
Understanding value
We all want to purchase stocks that appear good value. To determine this, investors often rely on key financial metrics. The price-to-earnings ratio (P/E) is a fundamental one that compares a stock’s current price to its earnings per share. A lower P/E ratio may indicate better value.
There a host of complementary metrics including the EV-to-EBITDA ratio and, my favourite, the price-to-earnings-to-growth ratio (PEG).
Additionally, assessing dividend yields, debt levels, and other financial indicators provides a comprehensive view.
By scrutinising these, investors aim to make informed decisions, identifying stocks with strong fundamentals and growth potential in the market.
Is it good value?
On the surface, BT shares certainly don’t look bad value compared to peers, especially with the share price declining in recent weeks.
The stock trades at 6.4 times earnings from the past 12 months. That’s clearly not expensive from an index perspective, and it’s a 62.6% discount versus the communications sector.
Equally, its forward P/E ratio of 7.2 doesn’t look overly expensive either. In this case, that represents a 58.5% discount to the sector.
However, these metrics, often the first point of call for investors, can also be misleading.
Growth and dividends
We want to invest in companies that are growing, or ones that are capable of paying sizeable dividends while essentially sitting still.
BT does pay a strong dividend. The yield currently sits at 6.6% and in 2023 it was covered 2.5 times by earnings — that’s a good coverage ratio.
However, many investors, including myself, are looking for a bit more than 6.6% returns. We want to see the business grow as well.
Unfortunately, there’s little sign of this happening over the medium term. Here’s the earnings per share (EPS) forecast.
| 2024 | 2025 | 2025 | |
| EPS (p) | 15.5 | 15.1 | 15.9 |
Communications is not a high-growth sector, but these figures aren’t exactly exciting.
Debt
Debt is another issue. BT has a net debt in excess of £19.7bn — up from £18.9bn in March — and cash per share of just 3p. That’s a concern for investors, especially in the context of slow earnings growth. Moreover, BT faces a massive capex burden of around £15bn for the fibre rollout.
Like several other telecoms, BT appears to be treading water as debts mount but growth slows. And given this sizeable capex spend, BT may even struggle to maintain its dividend at the current level.
