Why I think the BT share price is too cheap to miss

The BT share price has crashed by 75% in five years. Here’s why I think it finally looks like a great buying opportunity.

| 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.

I’ve had mixed thoughts about BT (LSE: BT-A) over time. The company, in my view, spent years over-stretching itself, for example with spending on TV content. And it didn’t keep a close enough eye on the balance sheet. But I think current management has a better grip on what’s best for the long term. Yet the BT share price has crashed by 45% so far in 2020.

We’re looking at P/E multiples of around five, which suggests big trouble. Now, I’m not saying there aren’t any problems at BT. But are they bad enough to warrant a valuation that’s so low you’d think investors are expecting it to go bust?

The company suspended its dividend, along with other FTSE 100 firms in the Covid-19 crisis. And that added to the BT share price woes. But I think it’s one of the best moves the board could have made. Why? Well, the pandemic lockdown is hurting businesses across the board. And cutting dividends is to preserve capital that could be needed for the fight back.

Capital preservation

But BT has been in desperate need of capital preservation for years. No, decades. Before the dividend suspension, and even with the BT share price in freefall, BT was paying 15.4p per share. In 2019, with earnings dropping for several years in a row, that was covered 1.7 times by earnings. That might be fine for a cash-cow company, with no need for vast quantities of cash for technological development and expansion. And with no debt.

And that’s the killer. BT’s old style of financially reckless management has resulted in a vast pile of debt. At the end of the first quarter, it had £18bn of net debt on its books. That’s approximately 2.5 times estimated annualised EBITDA, and I think it’s got to come down. BT, in my view, should maintain a dividend moratorium until that ratio is significantly lowered. I’d like to see it paid down as low as 1.5x, but at least below 2x. That might be optimistic, as most FTSE 100 boards put way too much priority on stuffing their shareholders’ pockets with short-term cash.

BT share price too pessimistic

Anyway, now I’ve given the company a drubbing, why do I see the BT share price as a buy? Well, BT’s problem is debt, but everyone already knows all about that. Yet I think investors have done what they typically do during a bear market. They’ve built the bad news into the BT share price and then added a whole load of extra pessimism for good measure. In short, I think BT shares are significantly undervalued, even considering the debt.

BT is in an expanding market, especially with 5G technology really just in its infancy. I’ve said for years, ever since before the dotcom boom, that the internet is in its infancy, and I still think that way. The Covid-19 lockdown, with the growing-but-still-small move to online everything, has shown that we’ve really only advanced a little way into that infancy even today

The firm now has a great opportunity to get it right. And I think the BT share price really is too cheap to miss.

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.

Alan Oscroft 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

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »