I’ll admit that I’m not the biggest fan of BT (LSE: BT.A). I think the company has made several miss-steps over the past few years, and it’s now paying the price as customers desert the business.
As well as poor levels of customer service, in my opinion, the company also has too much debt, has been under-investing in its operations, and chasing growth in markets where it doesn’t have much experience, predominantly the pay-TV market.
However, it now looks as if the company is finally starting to get its act together. Under new CEO Philip Jansen, who has only been at the helm since February, BT is planning to invest more and is considering potentially cutting its dividend to fund the investment in its future.
A new direction
Alongside BT’s full-year results, published at the beginning of May, the new CEO announced the company is planning to increase its target for super-fast broadband connections from 3m to 4m homes by March 2021 and from 10m to 15m by the mid-2020s.
This ambitious target will cost up to £8bn to roll out fibre broadband to a total of 15m homes. To fund this spending, management is reportedly exploring all options, which includes borrowing and cutting dividends to investors.
A dividend cut is usually bad news for investors. But in this case, I think it’s the right decision. BT last cut its dividend in 2009. Since then it’s been on a spending spree, ploughing tens of billions of pounds into acquisitions and the development of BT Sport.
But despite capital spending of £17.4bn since 2014 and the £12.5bn acquisition of mobile network EE in 2016, BT’s net profit has increased just 7% over the past five years. Reported earnings per share have actually declined by 10%, thanks to the higher number of shares in issue. Since 2014, net debt has surged from £7.3bn to £12bn.
It’s tough to put a positive spin on these numbers. The telecommunications group has spent tens of billions of dollars over the past five years with nothing to show for it. It’s no surprise, therefore, the stock has underperformed the FTSE 100 by around 11% per annum since 2014, that’s including distributions to investors.
Drastic action
In my view, drastic action is required to spark BT’s recovery, and spending more to invest in its customer offering is a great place to start.
The new management seems to understand BT is in trouble and is working to change the company’s trajectory. That’s why I think the tide could be turning for the BT share price.
Although I’m not a buyer of the stock just yet, recent comments from management suggest they’re committed to fixing the group’s problems and they’re willing to reduce BT’s gold-plated dividend to free up more cash and strengthen the balance sheet, which should be a priority in my opinion.
I’ll be keeping a close eye on the stock over the next 12 to 24 months as Jansen and his team get to work putting their stamp on the business.
