BT shares look cheap. I think there are better FTSE 100 stocks to buy though

BT (LON: BT.A) shares are trading at their lowest level since 2010. Yet buying now could be dangerous, says Edward Sheldon.

| 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.

Like many other FTSE 100 shares, BT‘s (LSE: BT.A) have been crushed recently on the back of coronavirus uncertainty. Over the last month, its share price has declined from around 155p to 117p – a fall of roughly 25%. That’s the lowest level they’ve traded at since 2010.

At 117p, BT shares look very cheap. With analysts forecasting earnings per share of 23.4p for the year ending 31 March, BT’s forward-looking P/E ratio is just 5. Its trailing dividend yield is 13%. 

That said, I’m still not tempted to buy BT shares for my own portfolio. Here, I’ll explain why I think there are better FTSE 100 stocks to buy at the moment.

A low-quality stock

The first thing that concerns me about BT is its huge debt pile. At 31 December, net debt stood at a whopping £18.2bn. By contrast, total equity on the balance sheet at 30 September was £10.3bn.

I see this as a problem, as highly-leveraged companies tend to be more vulnerable during economic downturns. With the coronavirus threatening to derail global economic growth, I don’t think it’s the right time to be investing in a business with a weak balance sheet.

My next concern is in relation to BT’s dividend. As I’ve said for a while now, I think there’s a good chance it will be cut in the near future, due to the company’s large debt pile and pension deficit. It appears City analysts agree with me.

The consensus dividend forecasts for this financial year and next are 15.1p and 10.8p per share, lower than last year’s payout of 15.4p. I’d much rather buy a stock with healthy dividend growth prospects.

Finally, recent results suggest BT is still struggling to generate any growth. For example, third-quarter results in late January showed a 2% drop in revenue for the nine months to 31 December.

That was down to ongoing headwinds from regulation, competition, and legacy product declines, along with a 3% decline in adjusted EBITDA. I believe this lack of growth is likely to hamper share price growth in the near term.

All things considered, I see BT Group as a low-quality stock. I think investors can do much better elsewhere.

Better buys

So, what are some FTSE 100 stocks I’d buy over BT Group? Well, one I continue to hold in high regard (and bought more of for my own portfolio earlier this week) is Legal & General.

It also trades at a rock-bottom valuation and offers a big yield (8.5%), yet appears to have much more momentum than BT. For example, the company recently reported a 16% jump in earnings per share for 2019. it also lifted its dividend by 7% – the 10th consecutive increase.

Other FTSE 100 stocks I like the look of right now include Sage, JD Sports Fashion, and Rightmove. These companies may not be as cheap as BT, yet all three have attractive growth prospects and strong balance sheets, which leads me to believe they should be good investments over the long term.

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.

Edward Sheldon owns shares in Legal & General Group, Sage, Rightmove, and JD Sports Fashion. The Motley Fool UK has recommended Rightmove and Sage Group. 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

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

10% dividend growth! 2 FTSE 100 stocks tipped to supercharge cash payouts

These FTSE 100 stocks have strong records of dividend growth. And they're expected to keep on delivering, as Royston Wild…

Read more »

Investing Articles

Down 17% in a month and yielding 7.39%! Is this FTSE 100 share a screaming buy for me?

When Harvey Jones bought Taylor Wimpey last year he thought this FTSE 100 share was a brilliant long-term buy-and-hold. Has…

Read more »

Investing Articles

Here’s how I’m using a £20k ISA to target £11k+ in income 30 years from now

Is it realistic to put £20k in an ISA now and earn over half that amount every year in passive…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

If I could only keep 5 UK stocks from my portfolio I’d save these

Harvey Jones is running through his portfolio of top UK stocks to see which ones he couldn't bear to do…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

I’m aiming for a million buying unexciting shares!

By investing regularly in long-established, proven and even rather dull businesses, this writer plans to aim for a million. Here's…

Read more »

Investing Articles

3 things to consider before you start investing

Our writer draws on his stock market experience to consider a few vital lessons he would use to start investing…

Read more »

Investing Articles

Will this lesser-known £28bn growth stock be joining the FTSE 100 soon?

As the powers that be plan a reorganisation of Footsie listing rules, this massive under-the-radar growth stock could find its…

Read more »

Investing Articles

Fools wouldn’t touch these 5 FTSE 350 flops with a bargepole – how come I own 3 of them?

Harvey Jones took a chance on three struggling FTSE 350 stocks in the hope that they'd stage a dramatic recovery.…

Read more »