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B.T.'s (LSE:BT.A) has soared since the company's bullish May update and outlook statement, but the stock still looks attractive for passive dividend income.
With the telecoms company's share price at around 139 pence (26 June), the prospective dividend yield for the business year to March 2026 is almost 5.8%.
That's tempting in itself. But after CEO Allison Kirkby's assessment last month, I think there's a good chance for incremental dividend growth in the coming years.
Recovery and growth
This way, shareholders can secure a decent and growing passive income from that dividend, but there is also the potential for capital gains from a rising share price.
It has happened before. BT appeared to be on the rocks in the spring of 2009, after the credit crisis and during the “great” recession of that decade. But between then and the end of 2015, the shares rose by more than 500%.
However, one of the current concerns is the mountain of debt the company has on its balance sheet, fueled by the need to invest so much money in next-generation networks, including the massive rollout of fiber optic broadband.
So Kirkby's assertion that the company has already exceeded its capex on the fibre network came as a relief to the market. I guess that's what the strong rally in the stock is all about.
These sudden moves higher often discourage value-oriented investors. That's understandable. But one argument is that the business's fundamentals and prospects have improved. Therefore, the improvement seems justified.
The company's £3 billion cost and service “transformation” The program was completed a year ahead of schedule and the company has achieved “The inflection point”regarding its long-term strategy, Kirkby said.
Increased free cash flow
It's been widely reported, but the company now estimates that it can more than double its normalized free cash flow over the next five years.
Nothing is guaranteed and the company may encounter more unforeseen challenges along the way. For example, a recession in the economy would almost certainly cause stock prices to fall again.
However, better free cash flow forecasts strike me as a factor supporting continued dividend growth (perhaps the most important factor of all).
After years of frowning, I'm finally starting to believe that BT may be able to pass my sniff test. I now feel that things are different. This transforming business may be entering a lasting period of recovery and growth (I hope).
Looking ahead, Kirkby said the company is sharpening its focus and “throttle” modernizing its operations. It also aims to optimize its global business operations.
Overall, Kirkby believes BT is now positioned to generate “significant” Growth. And overall, despite the risks, I think the stock has the potential to generate decent passive income for its shareholders through a steady stream of dividends.
However, despite my enthusiasm, I wouldn't say it's a no-brainer because all actions have the potential to disappoint and delight. But I see it as worthy of further investigation.
