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I have long been suspicious of the BT Group (LSE:BT.A) for several key reasons, but I have changed my mind and with Q1 numbers due out on 25 July I am taking a second look at it.
Market sentiment has returned to favour BT, with the share price up around 35% since the beginning of May. It remains down 27% over the past five years and down 64% over the past 10 years.
But I think the recovery will be more advanced by this time next year.
Sustainable dividend
The appeal of BT shares has been its consistent dividend. Through thick and thin, BT's board has made a concerted effort to put a good amount of money into shareholders' pockets each year.
At this time, the expected dividend yield is at 5.7%. There are higher yields in the FTSE 100 Indexbut I value long-term reliability more.
Of course, dividends need cash flow, but BT is saddled with massive debt and has been spending ever-increasing sums on its network rollout for years.
Something would surely break and the dividend would have to be cut. Well, the company's annual results in May helped to ease fears about that risk.
Key changes
BT reached a significant milestone last year. Chief Executive Allison Kirkby said the company has “We exceeded the capex peak on our full fibre broadband rollout and delivered our £3bn cost and service transformation programme a year ahead of schedule“.
He added that BT had “We have reached a turning point in our long-term strategy.“.
This should mean a reduction in capital expenditure in the coming years, with a boost to cash flow, which in turn should ease pressure on the dividend and may even mean a small reduction in debt.
In fact, BT now expects to record normalized free cash flow of “£1.5 billion in FY25, £2 billion in FY27 and £3 billion by the end of the decade“.
Danger ahead
These are ambitious goals, but I am nervous about seeing such bold statements. Optimism like this can give a stock a short-term boost, as we have seen since the results were published.
But beyond that, I fear that it often sets a company up for a fall. If it hits its targets, well, that was already expected anyway, so there's nothing to brag about. And if it doesn't hit them, it doesn't hit them and the stock price can suffer.
I prefer a company that promises little and delivers a lot. Those that do seem to have the best track record of long-term shareholder returns.
Debt can bite
Net debt as at 31 March stood at £19.5bn. Even with the share price, which has risen today, BT's market capitalisation is just £13.7bn. Debt is still more than 1.4 times the value of the company.
That must be getting close to the edge of what makes sense. I'll be keeping a close eye on this to see if BT's bold new vision plays out as planned.
But even with the risk, I think BT is worth considering for further share price gains in the coming years. Oh, and for more cash dividends.
