The BT share price soars by 10%. Here’s why I think the FTSE 100 giant can’t be ignored

BT plc (LON:BT-A) jumps as earnings beat expectations. Despite a cut to the dividend, this Fool still thinks the shares are a great buy for income investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Stock in telecommunications behemoth BT Group (LSE: BT-A) rocketed in early trading this morning as market participants responded positively to the latest interim numbers from the FTSE 100 firm.

With the share price finally starting to show signs of a sustained rebound, should previously reluctant investors — particularly those focused on generating income from their capital — now think about adding the stock to their portfolios? I think so.

“Encouraging results”

Reported pre-tax profit and adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) came in at £1.34bn and £3.68bn respectively over the first half of BT’s financial year as a result of costs being trimmed and higher volumes of expensive smartphones being sold by its consumer business. The pre-tax profit number was an increase of 24%. 

Elsewhere, the company stated that it continued to see improvement in customer experience metrics, an increase in the speed of ultrafast broadband being deployed and “positive progress” in transforming its operating model.

It wasn’t all good news, however. At £11.59bn, reported revenue was 2% lower over the six months to the end of September with BT’s consumer arm impacted by price reductions at Openreach and relatively poor performance at its enterprise business. Free cash flow also fell 22% to £974m, partly as a result of capital expenditure climbing by £140m to £1.83bn.

Having labelled today’s numbers as “encouraging“, outgoing CEO Gavin Patterson reflected in his statement to shareholders that the company was beginning to see the benefits of its strategy to “simplify and strengthen the business and improve efficiency“.

He went on to remark that guidance on the full year hadn’t changed and that, despite growing pressure from rivals, BT still expected EBITDA to be in the “upper half” of the £7.3bn-£7.4bn range. 

Dividend star

For some time now, I’ve felt that the market was being too harsh on BT. Almost three years ago, the share price was close to breaching 500p. By May 2018, it had fallen to as low as 203p — a reduction of just under 60%. Even today, the shares still change hands on a fairly cheap price-to-earnings (P/E) ratio of 10.

Despite the fact that BT’s new leader will be paid more than his predecessor (whose remuneration was already a contentious issue among shareholders), I’m also optimistic about the arrival of ex-Worldpay boss Philip Jansen next year. While increased competition and a sizeable pension deficit mean he will still have his work cut out, confirmation that the company will not be spinning off Openreach, despite opposition from activist investors, does remove some uncertainty, at least in the short term.

Arguably BT’s biggest draw, however, remains its dividend. Today, the company announced an interim payout of 4.62p per share or 30% of last year’s total cash return to shareholders (15.4p). That’s a cut of 4.7% from the 4.85p given back to owners in the previous financial year.

That’s not to say that income investors should be unduly worried. Assuming analyst projections are correct, BT is expected to hand back 15p per share in 2018/19. Taking today’s share price move into account, that leaves a yield of around 5.7%. Given that interest rates are unlikely to rise significantly any time soon, that’s certainly not to be sniffed at. Despite the aforementioned fall in free cash flow, payouts will also likely be covered 1.7 times by profits, which is an improvement on last year.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »