Are BT shares a steal on a P/E ratio of 6?

BT shares have dropped this year and are currently trading for just over £1. Is this price a bargain? Edward Sheldon takes a look.

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Exterior of BT Group head office - One Braham, London

Image source: BT Group plc

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BT (LSE: BT.A) shares have fallen (again) recently. After rising to near 140p in December, they have pulled back to around 115p at the time of writing.

Are they a steal at current prices? Let’s discuss.

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Low valuation

For the year ending 31 March 2024, City analysts expect BT to generate earnings per share of 18.6p. This means that at the current share price the forward-looking price-to-earnings (P/E) ratio is just 6.2.

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That’s a low valuation. For reference, the median P/E ratio across the FTSE 100 index is about 14 at the moment.

Now, I’m not expecting BT’s P/E ratio to shoot up to the market average any time soon.

That’s because the company is essentially generating no growth at the moment (while plenty of other companies are). This financial year, revenue is expected to be flat year on year.

It also has a rather large pile of debt on its balance sheet. At the end of September, BT’s net debt stood at around £20bn. This is a risk with interest rates at higher levels and it needs to be factored into the valuation.

However, I do think a P/E ratio of 6.2 is probably a tad too low. In other words, I could see the valuation rising a little if there’s some good news.

I’ll point out that several brokers actually believe the share price could rise significantly from here. For example, Barclays has a target price of 220p. Meanwhile, JP Morgan has a target price of 290p.

Not everyone is so bullish on BT shares, though. In December, it came to light that hedge fund Kintbury Capital is shorting the shares (hedge funds short a stock when they expect it to fall). Chris Dale, founder of Kintbury Capital, told attendees at a conference in London that BT’s debt levels of the company were rising and that the company’s decision to reinstate dividends would ultimately backfire.

High dividend yield

Speaking of dividends, the yield on the shares is quite attractive at the moment.

Last financial year, BT paid out total dividends of 7.7p per share. At today’s share price, that translates to a yield of about 6.7%.

Dividends are never guaranteed, of course. But with dividend coverage (the ratio of earnings to dividends) currently at quite healthy levels, this level of payout looks sustainable in the near term.

It’s worth noting that BT has a ‘progressive’ dividend policy and is hoping to increase its payout in the years ahead.

So, dividends from the shares could provide solid returns.

A steal?

Putting this all together, I think BT shares probably offer some value right now. The P/E ratio is at rock-bottom levels and the dividend yield is high.

As for whether they are a ‘steal’ though, that’s hard to know. That’s because there are some genuine risks, like the big debt pile.

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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.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. 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.

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