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I’m not one for trying to time investments, but 16 May 2024 was an auspicious day for BT Group (LSE: BT.A) shares. On that day the share price climbed 17%. And with a few wiggles along the way, it’s since kept on rising.
It was the day BT released full-year results for the fiscal 2024 year. And £10,000 invested in the stock the day before would now be worth £16,370 give or take a few pounds.
The key turnaround event was summed up by CEO Allison Kirkby: “Having passed peak capex on our full fibre broadband rollout and achieved our £3bn cost and service transformation programme a year ahead of schedule, we’ve now reached the inflection point on our long-term strategy.”
Perspective
Long-term investors need to see this in a wider context. The gains of the past year or so will have pleased shareholders. But the BT share price is still more than 60% down since its levels of late 2015 before nearly a decade of rot set in.
So will the past year’s share price growth translate into steady longer-term returns? On the headline valuation front, I think BT still shows attractive value.
We’re looking at a forecast price-to-earnings (P/E) ratio of 12.5, which doesn’t seem demanding. But the P/E is a crude measure and doesn’t account for debt. Here we’re looking at net debt approaching £20bn, at a similar level to BT’s market cap. It suggests an effective P/E for the enterprise itself of around twice the headline figure. Hmm, maybe not so cheap.
Still, debt is only one of three things that turned me off BT for so long.
Sustainable dividend
One was my conviction that BT’s previous dividend strategy was destroying shareholder value. It was paying too much and the share price suffered as a result.
But since the dividend rebasing in the wake of the pandemic, I see it as more sustainable now. Forecasts show dividends rising in the next few years. And crucially, they should be covered around 1.8 times by projected earnings.
The final thing that scared me was the size of BT’s pension fund deficit. But the company is chipping away at it, contributing £0.8bn in the 2024-25 year. It reduced the deficit to £4.1bn by 31 March. And BT reckons it’s on track to get back to full funding by 2030.
Long term
Stepping back from finances, one key thing worries me as a long-term investor. BT is putting everything into fibre to the premises (FTTP) broadband. It’s technically complex and costly. And right now I think it’s probably exactly what BT should focus on.
But I worry a bit about the eggs-to-baskets ratio. The telecoms landscape is very different today than from 20 years ago. What will the next 20 years bring?
Still, I could put that aside and buy for the 4.4% forecast dividend yield if it wasn’t for the debt. So it’s not for me. But investors less concerned about debt funding might do well to consider BT.
This story originally appeared on Motley Fool
