I’ve long been wary of the BT Group (LSE: BT.A) share price, for a few key reasons. But I’ve changed my mind. And with Q1 figures due on 25 July, I’m taking another look.
Market sentiment’s turned back in BT’s favour, with the share price up around 35% since early May. It’s still down 27% over the past five years, and 64% over 10.
But I can see the recovery being further ahead by this time next year.
Sustainable dividend
The attraction of BT shares has been their steady dividend. Through thick and thin, the BT board has tried hard to put a nice bit of cash every year into shareholders’ pockets.
Right now, the forecast dividend yield stands at 5.7%. There are bigger yields in the FTSE 100, but I value dependability more in the long run.
Dividends, of course, need cash flow. But BT carries huge debt, and it’s been spending rising sums on its network rollout for years.
Surely something would crack, and the dividend would have to be cut? Well, the firm’s full-year results in May helped soften fears on that risk.
Key changes
BT reached a major milestone in the past year. CEO Allison Kirkby said the company has “passed peak capex on our full fibre broadband rollout and achieved our £3 billion cost and service transformation programme a year ahead of schedule”.
She added that BT had “reached the inflection point on our long-term strategy”.
This should mean falling capital expenditure in the next few years, with a boost to cash flow. That in turn should take the pressure off the dividend. And it might even mean a bit of debt reduction too.
In fact, BT now expects to post normalised free cash flow of “£1.5bn in FY25, £2.0bn in FY27 and £3bn by the end of the decade”.
Danger ahead
Those are ambituous targets, but it makes me twitch a bit when I see such bold statements. Optimism like this can give a stock a short-term boost, as we’ve seen since the results were released.
But beyond that, I fear it often sets a firm up for a fall. If it hits its targets, well, that was expected anyway so there’s nothing to shout about. And if it falls short, that’s a miss and the share price can take a hit.
I prefer a comany to underpromise and overdeliver. The ones that do that seem to build up the best long-term records of shareholder returns.
Debt can bite
Net debt at 31 March stood at £19.5bn. Even at today’s boosted share price, BT’s market-cap’s only £13.7bn. The debt’s still more than 1.4 times the value of the company.
That has to be getting close to the limit of what makes sense. I’ll be keeping a keen eye on it as we watch to see if BT’s bold new vision unfolds as planned.
But even with the risk, I reckon BT’s worth considering for further share price gains in the next few years. Oh, and for more of that dividend cash.
This post was originally published on Motley Fool
