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In retrospect, we know that the Rolls Royce The stock price between 2020 and 2022 was a bargain on the stock market. So it stands to reason that there are probably other gold stocks. FTSE 100 Index opportunities that stare us right in the face.
Could BT Cluster (LSE:BT.A) What stocks are one? Let's take a look.
A trap of values
I first considered BT shares a few years ago and am now glad I didn't invest. They are down 62% in a decade and 15% in five years.
BT has long been a value trap. This is when a stock looks like a bargain because its price is low. But instead of recovering, it traps investors by either staying stuck in the bargain category or falling even further.
This could be due to a number of reasons, such as poor prospects, underlying issues or repeated dividend cuts (which undermine investor confidence). I would say BT ticks all of those boxes.
First, it operates in a mature telecoms sector with little growth prospects. It also has a long-standing underlying debt problem and its long-term track record of dividend increases is simply terrible.
BT dividend per share (2005-2023)
Smart investors see value
Since I last reviewed BT shares in April, they are up 32%. And today (12 August) they are up 6.2% to 138p after it was announced that Indian billionaire Sunil Bharti Mittal's conglomerate would buy a 24.5% stake from BT's largest shareholder.
Commenting on the investment, Bharti said: “BT has a strong portfolio of market-leading brands, high-quality assets and an experienced management team… BT is playing a key role in expanding access to fibre broadband infrastructure for millions of people across the UK.”
The stake, valued at around £3.2bn, is clearly a positive development for shareholders. Interestingly, the Bharti conglomerate has not applied for a seat on BT's board, which is a vote of confidence in the turnaround being undertaken by new CEO Allison Kirkby.
In June, Carlos Slim, the Mexican telecoms billionaire, separately paid £400m for a 3% stake in BT. So several industry veterans see huge value in this. Now I wonder if I should get on board too.
A bargain for the FTSE 100?
If you look at BT's revenues, the only thing you have to admit is that they are remarkably consistent.
| Fiscal year (ending in March) | Annual income |
| Fiscal year 26 (forecast) | £20.9 billion |
| Fiscal year 25 (forecast) | £20.8 billion |
| Fiscal year 24 | £20.6 billion |
| Fiscal year 23 | £20.7 billion |
| Fiscal year 22 | £20.8 billion |
Despite this lack of revenue growth, the stock could still be a solid investment as BT's free cash flow is expected to improve now that its huge investments in expanding fibre broadband have likely peaked.
Indeed, the group expects normalised free cash flow to reach £3bn by 2030, up from £1.3bn last year. This is vital because BT still has a massive net debt position of around £20bn.
In addition to paying down debt, this cash could also support a dividend increase. The forward yield is currently 6% and appears to be well covered.
Meanwhile, the forward-looking price-to-earnings (P/E) multiple is around 7.5. That's a cheaper price than the FTSE 100 and BT's peer group. So I can understand why investors in the sector are licking their chops at a potential bargain here.
However, I cannot ignore BT's accumulated debt when it exceeds its market capitalisation of £13.8bn. It remains a major concern, as does stagnating revenue growth and increasing competition.
All in all, I feel there are better opportunities for my money elsewhere.
