I’ll admit it, I don’t really get the appeal of BT (LSE: BT.A) shares. But I also admit that I might be behind the times. Am I missing something?
I can’t shake off memories of when BT looked like a sprawling empire that had lost its way. A tired legacy brand, patchy customer service, bulging debt and a massive corporate pension schemes hanging round its neck.
Like many troubled giants, it started doing erratic things. The expensive plunge into sports broadcasting rights was the clearest example, splashing billions to compete with Sky, only to retreat into a joint venture. Telecoms is a competitive, capital-intensive industry. Get strategy wrong and the bill is enormous. Yet since Allison Kirkby took over as chief executive two years ago, BT has shone.
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FTSE 100 fight back
Kirkby has simplified the sprawl by cutting costs and shrinking the workforce as she battles to transform BT from a confused conglomerate to a lean, mean connectivity business. Non-core assets have been trimmed and capital allocation looks more disciplined.
I was ready to buy the stock a couple of years ago when it looked absurdly cheap, trading on a price-to-earnings (P/E) ratio of around six with a trailing dividend yield close to 7%. Then I got cold feet. It was still too messy for me.
Bad move. The shares have doubled since those lows, with dividends on top. The last 12 months have been more volatile but they’re still up about 35% in that time. A big chunk of that came in the last month, with the shares jumping a mighty 13.7%. That would have turned £15,000 into £17,055 in a month. More than £2,000 in short order.
What makes that rally more surprising is that third-quarter results (5 February) weren’t exactly stellar. Revenue slipped 4% year on year to £5bn, due to weaker service and handset sales, although disposals made the headline number look worse than it is. Reported pre-tax profit fell sharply, hit in part by losses from the sports joint venture.
This stock is a mixed bag
Yet there were bright spots. BT saw record demand for Openreach full-fibre, while cost-cutting continued at pace. Crucially, management reiterated full-year guidance and pointed to a step-up in free cash flow over the next few years. So where next?
Full-fibre expansion remains BT’s key growth engine. As more homes connect, revenues should with luck become steadier and more predictable. Artificial intelligence and automation could further reduce headcount, boosting margins. That’s the theory, anyway.
There are risks. Having put in the hard yards, Openreach risks losing customers to smaller, nimbler alt-net rivals. BT still has almost £20bn of debt, roughly equal to its market cap.
The trailing dividend yield has eased to around 3.9%, but if earnings forecasts are met it could edge back towards 4.5% over the next couple of years. With a P/E ratio of about 11.3, BT isn’t the screaming bargain it once was, but it’s hardly expensive either.
I think the shares are worth considering for long-term investors. But I have to admit, I still don’t quite get this company. Personally, I’ll focus my efforts on less risky, easier-to-read opportunities elsewhere in the FTSE 100.
This story originally appeared on Motley Fool
