The BT Group (LSE:BT.A) share price has increased by over 50% since November 2020. And over the last 12 months, it’s up by around 20%. These alone aren’t particularly exciting growth rates compared to other stocks today. However, after more than five years of decline, I think a suddenly rising share price is worth looking into.
So, why is it climbing? And should I be adding BT to my portfolio?
The rising BT share price
At the end of October last year, BT published its half-year results. They weren’t exactly ground-breaking. Revenue and underlying profits continued to fall by 7% and 5%, respectively. So why did the BT share price surge? Well, upon closer inspection, there appears to be some encouraging evidence of a potential business turnaround.
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BT’s management team has long since been investing in new projects to get it back on track. And these investments seem to be paying off. Total Fibre-to-the-Premises (FTTP) customers increased by 60%, with around 40,000 homes being connected every week. Low-margin legacy copper-based products are being discontinued as of September this year. And its total 5G customers increased to 1m.
Following the later publication of its 2020 Q3 results in February, the BT share price surged once more for similar reasons. FTTP and 5G customers continued to grow. The latter was exceptionally impressive as an additional 1.1m customers were added in three months.
Combining all of this progress with additional 5G contract wins has allowed the management team to raise earnings guidance, pay down debt, and reinstate shareholder dividends, with the first payment expected later this year.
Risks to consider
Today, BT is a crucial player in the UK communications technology & services sector. It owns and operates the country’s entire core fixed network and provides services to around 35% of the population under its brands (BT, EE, Plusnet and Openreach).
However, this wasn’t always the case. In order to reach this level of dominance, BT spent a lot of money securing contracts during the rollout of the 3G, 4G and now 5G networks. But with limited pricing power due to sector regulations, the firm wasn’t generating enough cash flow to fund these expenses. And so, it turned to debt financing as a solution.
While this undoubtedly enabled the business to grow, it also led to a monumental pile of long-term obligations. Today BT owes more than £25bn in debt and debt-equivalents. By comparison, based on BT’s current share price, its total market capitalisation is around £15bn. Needless to say, the firm is highly leveraged.
And let’s not forget that a high debt level means large interest payments. In BT’s case, its interest expenses amount to around £750m per year versus an operating profit of £3.1bn. In other words, almost 25% of underlying earnings are disappearing to simply maintain its existing debt level.
The bottom line
Overall, BT looks like it’s in a much better position than when I last looked at it. I find the continued growth of its 5G and FTTP customers is quite encouraging and it could be an early indicator of a potential turnaround for BT’s business.
But the debt level still concerns me, and with a large deferred income tax bill on the horizon, the company remains financially restricted. For now, I’m waiting to see the full-year results for 2020, and so the stock is staying on my watch list.
