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telecommunication company BT (LSE: BT.A) saw its shares fall 4% in a matter of two trading days last week. It is now down a staggering 86% from the all-time highs of late 1999.
This level of volatility is not unusual for one of the most traded stocks in the world. London Stock Exchangebut it could be an opportunity for me to buy shares at a low price.
I can see some compelling reasons to open a position with the company.
Dividend Yield and Stock Price Growth
BT’s share price peaked during the dot-com boom of 1999. Investors were piling in, dazzled by the potential of the nascent Internet. Shares crashed soon after and never recovered, with today’s share price still 86% below those highs.
A return to those levels seems unlikely. In fact, I think this £14.8bn telecoms business is operating in a market too saturated for further rapid growth, which means I doubt I’ll see my share value rise.
On the other hand, the company offers its shareholders an excellent annual return of 5.43%. That’s one of the highest dividend yields you could get from any FTSE 100 company. To put it in perspective, even with rising interest rates, you would receive only 2-3% per year from most ISAs in cash.
If you could rely on an annual payment of £543 for every £10,000 invested, you’d be very happy. And with the exception of 2020 due to the pandemic, BT has offered regular and generous dividends for decades.
Stocks also look cheap. A price-earnings ratio of around eight compares very favorably with the FTSE 100 average of 14 and the UK telecoms sector of just over 17. All things being equal, I expect the share price to rise towards the industry average, which would give me more returns.
The big problem here is that, in this case, things are definitely not the same.
Debt the size of Iceland
The elephant in the room with BT is its staggering debt: the company currently owes around £19bn. That’s about the same as the GDP of an entire country like Iceland.
It is even £5bn more than the company’s own market capitalisation. If management wanted to give the company away for free, the new owners would be in a much worse situation.
Not all debt is bad, of course. But the reason for BT’s troubles is a staff pension shortfall that the company doesn’t really control. And that deficit is like a leaky pipe. It will continue to cause problems until it is fixed. To emphasize this, the debt has increased by over a billion in the last year alone.
What does this mean to me? Well, dividends that look attractive right now could be cut or eliminated to free up cash to service debt. That makes it a risky play, in my book.
I am buying?
So while there are positives about the company, the reality is that cheap dividend-paying companies are plentiful in Britain at the moment. High debt levels mean I will keep a barge distance between myself and this stock.
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