Image source: BT Group plc
The BT Group (LSE:BT.A) share price currently sits just above 200p, up 9.3% year to date. Not exactly explosive growth, but it’s steady – and to be expected from an income-focused stock.
When we add the 4.12% dividend yield, the total returns start to look more interesting.
But to accurately forecast what the total return could be in the coming 12 months, we need to look at where the price might be headed.
What BT’s latest results tell us
BT’s full-year results to 31 March show a business in transition, with moderate revenue and earnings growth and improved cost control.
- Revenue: £20.4bn.
- Adjusted EBITDA: £8bn.
- EBITDA margin: 39.2% (up from 38.4%).
- Free cash flow: £1.6bn.
The core mitigating factor for the past year has been fibre expansion costs. Openreach, the group’s infrastructure arm, is spending £15bn on full-fibre rollout. Around 66% of UK premises are already covered, with 80% targeted by year end. That’s a massive infrastructure push that should support future earnings growth.
Once complete, fibre customers typically stay longer and pay more than copper users. But when will that profit be realised?
Analysts seem optimistic
Consensus points to an expectation of faster earnings growth than revenue over the next few years as costs taper off. On top of that, if the group can sell its old copper cabling for scrap it could raise significant cash.
That’s bumped up the average price target to 224.8p, implying 11.56% capital returns. Some bullish targets even envisage 300p, although that seems a bit hopeful. Add the 4.12% dividend, and total returns could hit 15.68%.
What could that actually equate to for the average UK investor? Well, the median UK salary after tax is around £2,400. At 15.68%, that would deliver £376.32 in total returns, boosting the pot up to £2,776.32 in a year.
Not life-changing money, but solid for a defensive stock.
What could go wrong?
Ofcom regulation has become a potentially significant risk, with the watchdog reviewing Openreach’s fibre discount proposals. Naturally, any restrictions would limit profits and likely hurt the share price. A final decision is expected by late September.
Competition’s also worth noting. BT might be the UK’s main network provider, but Virgin Media O2, TalkTalk, and CityFibre are all fighting for broadband customers. If BT loses customers, earnings will slow.
Which brings us to debt. All this fibre spending has left the group with £20.9bn of net debt. If interest rates rise, the group might have to slash dividends to meet its obligations.
Is BT worth buying now?
I think BT Group’s still worth considering for its long-term defensiveness, but potential investors should keep an eye on a few key points:
- Ofcom’s regulatory decision.
- Customer retention following the decision.
- Interest rates changes.
- The debt-to-EBITDA ratio.
But keep in mind, BT isn’t a growth stock. It’s a turnaround play with the potential for an improving dividend if things go right. If you’re seeking steady income with modest capital gains, that’s attractive.
However, while the business continues on this transformative path, the long-term outlook remains uncertain. For growth seekers, that makes it less attractive. If you’re chasing tech-style returns, there’s another UK stock that you’re likely to find far more appealing.
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Mark Hartley does not hold any positions in the companies mentioned.
This story originally appeared on Motley Fool
