After years of woe, the BT (LSE: BT.A) share price finally put on a show last month. It ended May 25.76% higher than it began the month, which is quite a turnaround. On the FTSE 100, only a resurgent Hargreaves Lansdown did better.
Long-term investors will still be hurting though. Over one year, BT shares are still down 11.07%. Over five years, they’re down 32.6%. And that’s after taking into account the recent bounce.
The BT jump is a great advertisement for buying oversold FTSE 100 stocks, which is exactly what I like to do. Unfortunately, it isn’t easy. Plenty of investors will have snatched at this falling knife in recent years, and regretted it. Now there’s another danger. Is this just a so-called dead cat bounce?
Beating the FTSE 100
BT shares jumped on a surprisingly upbeat set of results. Well, upbeat by its standards. Annual profits actually dropped 31%. However, investors chose to look past that and celebrate CEO Allison Kirkby’s claim that the group had hit an “inflection point”, as capital expenditure on its full fibre broadband programme finally peaked. BT also hit its £3bn cost savings target a year early and plans another £3bn of savings by 2029.
Inevitably, I’ll have to pay more to buy BT shares today. When I last considered them, a month or two ago, they looked dirt cheap trading at just 6.75 times forecast earnings That’s now climbed to 12.8 times.
At the same time, the forecast yield has fallen from 7.36% to 5.94%. That’s still comfortably above the FTSE 100 average of around 3.8%, but not as good as it was. As a consolation, it’s forecast to climb to 6.24% in 2024.
High dividend income ahead
Shareholder payouts look more secure though, with free cash flow set to double from £1.5bn this year to £3bn by 2030. Kirkby was confident enough to hike the 2023 dividend 3.9%. With BT over its cash flow slump, I’m hoping for more.
I’m always wary of buying after a short, sharp stock spike like this one. Quite a few value stocks in my portfolio jumped on a positive set of results over the spring, including wealth manager M&G and Phoenix Group Holdings. Gravity quickly exerted itself. Investors bank profits, attention wanders, expectations retreat, shares revert to the mean. It happens.
BT still has major underlying problems, including a top-heavy pension scheme and £20bn net debt. It’s also operating in a highly competitive market. One positive set of results doesn’t wipe the slate clean.
The investment case has undeniably improved, but as a value seeker I think it’s a bit risky to buy BT shares in the afterglow of May’s results. If the excitement ebbs, that’s when I’ll swoop. While I sit tight, I can see plenty more great value FTSE 100 stocks to amuse me.
