Right now, you’d struggle to find many people with a good word to say about telecommunications giant BT (LSE: BT-A), including my Foolish colleagues. When you consider the almost uninterrupted downward trajectory of its share price over the last two years, that’s not particularly surprising.
But is the investment case for one of the most hated shares in the FTSE 100 really so poor? I’m not convinced.
Too much negativity?
True, last week’s second-quarter numbers from the £25bn-cap weren’t anything to get excited about.
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To recap, reported revenue for the three months to end of December dropped by 1% to a little under £6bn. Pre-tax profits fell by the same percentage to the rather ominous-sounding £666m. These reductions were mostly explained by higher costs related to securing sporting rights (such as the Premier League) along with challenging market conditions for its global corporate services division. Despite stating that it was taking “robust actions” to improve performance at the latter, it’s clear that the recent accounting scandal in Italy is continuing to be a headache for the company.
On a more positive note, BT did state that its transformation programme remains “on track” and should allow savings of £400m to be made going forward. Following last year’s takeover of mobile operator EE, the company also added 279,000 subscribers to its books over Q2, bringing the total number of contract customers to more than 17m.
In addition to stating that recent numbers were in line with expectations, CEO Gavin Patterson reflected that the board was maintaining its outlook for the full year. He went on to say that BT was continuing to work closely with the government, Ofcom and its Communications Provider partners to speed up the deployment of fibre broadband and its commitment to deliver “ultrafast speeds to 12 million premises by the end of 2020“.
As updates go, Thursday’s announcement wasn’t great but, it was hardly the stuff of nightmares.
Going cheap
With BT’s stock trading at just 9 times forward earnings, it’s perhaps inevitable that value-focused market participants are beginning to rub their hands with glee. With the valuations of many top companies beginning to look somewhat rich, BT surely offers that margin of safety so treasured by investing legends such as Warren Buffet. While no guarantee that a particular investment will be successful, buying when market participants are at their most pessimistic does have the attraction of limiting downside risk.
But it’s not just bargain hunters that are likely to be tempted by BT’s shares. A forecast dividend yield of almost 6.3% for the current year is clearly far more than you’ll get from a cash savings account for the foreseeable future. Moreover, the company’s decision to maintain its progressive dividend policy will no doubt have pleased those holding the stock purely for its bi-annual payouts. It might be argued that the decision to follow several other FTSE 100 constituents (including National Grid and Legal & General) and set the interim dividend at 30% of the prior year’s full-year dividend also brings some much-needed transparency for owners.
Sure, BT’s huge pension deficit and the uncertainty surrounding the future of its Openreach infrastructure business (which maintains the UK’s principal telecoms network) may mean that a full recovery will take longer than expected. From both a value and income perspective, however, BT looks very interesting indeed.
