I’ll admit, I don’t really get the appeal BT (LSE: BT.A) shares. But I also admit that I may be late. Am I missing something?
I can’t shake the memories of when BT looked like a growing empire that had lost its way. A tired legacy, indifferent customer service, huge debt and huge corporate pension plans hanging around their necks.
Like many beleaguered giants, it began to do things differently. An expensive foray into sports broadcasting rights was a clear example, spending billions to compete with Sky, then pulling out of the joint venture. Telecoms is a competitive, lucrative industry. Get the strategy wrong and the bill is huge. But since Allison Kirkby took over two years ago, BT has been on a roll.
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FTSE 100 fighting back
Kirkby facilitated the expansion by cutting costs and reducing the number of employees as he strived to transform BT from a chaotic organization to a small, connected business. Non-core assets have been cut and the allocation of funds appears to be more ethical.
I was ready to buy the stock a few years ago when it looked absurdly cheap, trading at a price-to-earnings (P/E) ratio of nearly six with a trailing yield close to 7%. Then I got cold. It was still strange to me.
Bad move. Shares have doubled since that decline, with gains on top. The last 12 months have been very volatile but are still up about 35% in that time. Much of that came in the past month, with shares jumping 13.7%. That would turn £15,000 into £17,055 a month. Over £2,000 in no time.
What makes that rally even more surprising is that the results for the third quarter (February 5) were not exactly stellar. Revenue fell 4% year-on-year to £5bn, due to weaker service and handset sales, although the drop makes the headline number look worse than it is. Reported pre-tax profit fell sharply, partly due to the loss of the sports joint venture.
This stock is a mixed bag
However there were bright spots. BT has seen record demand for Openreach full-fibre, while cost reductions continue apace. Most importantly, management reiterated full-year guidance and pointed to an increase in free cash flow over the next few years. So where next?
Full fiber deployment remains BT’s main engine of growth. As more homes connect, the income should hopefully be consistent and predictable. Artificial intelligence and automation can further reduce human capital, increasing margins. That’s the theory, anyway.
There are risks. After putting in the hard yards, Openreach risks losing customers to smaller, nimbler alt-net rivals. BT still has debt of around £20bn, which is roughly the same as its market average.
The sequential dividend yield fell to around 3.9%, but if earnings forecasts are met it could rebound to 4.5% over the next few years. With a P/E ratio of about 11.3, BT isn’t the screaming bargain it once was, but it’s not cheap either.
I think the shares should be considered for long-term investors. But I have to admit, I still haven’t found this company. Personally, I will focus my efforts on less risky, more readable opportunities elsewhere in the FTSE 100.
