For years, I’ve seen a tension between the BT Group (LSE: BT.A) share price, the dividend yield, and the firm’s huge debt pile.
Paying big dividends while having to deal with that debt has seemed perhaps a little unwise to me.
I think that is shown in the share price, which is down more than 50% in the past five years. And that’s even when there’s a 7.5% dividend on the table.
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Dividend vs value
But when a share price slides like that, the dividend yield grows.
And there surely has to come a time when the price is low enough to cover all the debt-related risk. And the yield is high enough to balance sentiment in favour of dividend investors.
I’m wondering if we’ve reached that point with the BT share price. And whether the risk of further falls is low enough to make it worth buying for the dividend.
The following table shows how forecasts for the next three years could affect BT’s price-to-earnings (P/E) valuation and dividend yield (DY).
| Year | 2024 | 2025 | 2026 |
| Forecast P/E | 6.6 | 6.5 | 6.6 |
| Adjusted P/E | 19.2 | 18.9 | 19.2 |
| Forecast DY | 7.5% | 7.5% | 7.6% |
| Cover | 2.0x | 2.0x | 2.0x |
Adjust for debt
A P/E can be misleading when there’s a lot of debt on the books.
So I’ve included an adjusted P/E, based on what it would take to buy the company (its market cap) and pay down the debt.
BT shares might look very cheap on the raw P/E. But the adjusted P/E is based on net debt of £19.7bn at the interim stage, and a market cap of £10.3bn.
The debt is almost twice as much as the entire company valuation. And it doesn’t look so good on that basis.
The dividend
Going just by the dividend prospects, though, I can see how BT could look like a good long-term income buy.
There’s no earnings growth forecast for the next three years. But the mooted dividend would still be twice covered by earnings. And just to remind myself, that’s for a 7.5% yield.
Investing just £200 a month in BT shares for the next 10 years, and reinvesting the cash in more shares, could build me a pot of £35,000. Or, a single £20k Stocks and Shares ISA allowance could more than double to £41k at that rate.
And I reckon the prospect of that could send the share price higher, especially if BT can hit a new period of earnings growth. Or, at least, it could minimise the chances of further falls.
I’m torn
This whole look at BT’s forecasts and what they could do for dividend investors, and for the share price, leaves me torn. One side of me hates that huge debt, and isn’t too keen on the debt-adjusted P/E either.
But the other side loves those well-covered dividends. And thinks “Why not, if BT can keep paying, just forget the rest and take the cash?“
So, should I buy or avoid? I really can’t decide.
