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

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »