- BT Group (LON:BT.A) slumped in 2H of 2022 but tentative buying emerged at 110p-100p
- As a utility company they are profitable but not highly valued by market
- Potentially watch to buy when BT share price drops to double-digit
It is widely assumed that utility stocks are ‘boring’ and ‘safe’. Nothing could be further from the truth. In the UK, utility stocks are neither boring nor safe, as the broadband company BT Group shows.
Is BT Group (LON:BT.A) a good investment in the long term?
Over the past 12 years, BT Group shareholders had to endure a boom-bust cycle akin to a speculative dotcom stock. From a low of 80p, the stock soared 6x to a high of 480p-500p in 2015. Then, the stock collapsed 80 percent to 100p (see below). It was not the magnitude of the drop that astounded investors but the length too. Five years of persistent price decline.
While a rebound during the 2021 bull market raised hopes a new bull market in the stock, that rally petered out at 200p. Prices are now 35 percent below its 12-month peak.
Of course, readers will point out a similar trend in Centrica (CNA), where prices slumped by 90% from 400p, along with free-falling BT shares. Their collective price action highlights the immense risk in holding UK utility stocks ‘for the long term’.
However, after a prolonged bear market, should we be looking at buying BT shares again?
Naturally, investors are wary of the BT shares after a such a roller-coaster ride for these reasons:
- Investors are concerned about the large £19 billion debt pile sitting on the company’s balance sheet. Is the company profitable enough to deal with this? The answer is not all that clear. Revenue growth is static; so is BT’s profit margin.
- The BT pension deficit is another negative point. It is worth mentioning that BT’s pension is the largest in the country. As interest rates rise rapidly, the scheme is creaking under pressure. Last October, BT Pension Scheme reportedly lost £11 billion due to the ‘Mini Budget’. As one market commentator quipped: “BT is like a badly-run hedge fund which just happens to own a phone network.”
And did you know this: The size of BT Pension Scheme (£40-50bn) is actually three times larger than BT’s market cap of £12.7 billion? In all, BT appears to be a legacy business with plenty of financial and operational constraints on its business.
But its low share price is attracting predators, like the billionaire Patrick Drahi who bought up to 18 percent of BT in 2021. A hostile takeover is unlikely given the critical position of BT in the country’s telecom network. Still, it tells us there is some equity value embedded in the BT Group.
If any investor were to start with a clean slate, BT Group could be a candidate stock to buy – for its yield and the possibility of an oversold rebound. But I wouldn’t overweight the stock too much in any equity portfolio unless its share price stabilises and start to outperform.
When the overall market is at its lowest point. Remember BT’s business is cyclical too. The company reported losses when the wider economy was struggling; and had to eliminate dividends during the difficult time too (the pandemic).
Technically, the company may test the long-term support (at psychological 100p) in the weeks ahead if the macro conditions tighten again.
For now, the stock is trading within the 110-130p range and may consolidate in the weeks ahead as the resistance at 130-135p reasserts. The stock is in a defined downtrend.
But for long-term investors, double-digit BT share prices could be a worth a punt as that would place BT’s market cap below £10 billion (there are 9.9 billion shares outstanding). That valuation in my view would be pricing BT at a too-negative scenario.
‘About right’ is my opinion. The stock has had a strong rally in 2021 where prices surged from 100p to 200p (perhaps due to the accumulation by one large institutional investor).
Given the glacial pace of its business transformation, BT’s revenue growth has been hard to come by. In 2020, when the economy slowed down due to Covid-19, the utility company even had to cancel dividends (check out BT’s dividend history here). So at the moment, the market is just extrapolating BT’s current results into the next few quarters.
BT’s recent half-year results show static revenue of £10.3 billion and net profits of £893 million. Half-year interim dividends stood at 2.31p. Normalised free cash flow (NFCF) has dropped significantly from the previous year. So the company CEO Jensen had to increase cost-savings target to £3 billion by FY25. Net debt stood at £19 billion.
BT Group has a sticky business model with plenty of recurring revenue. This the market likes. But BT’s costs are large too, with hard-to-ignore items like pension deficits, network upgrades, and most recently, workers’ strikes. These the market doesn’t like.
Therefore investors are right to value the company at a low multiple. The stock’s Price-Earning ratio stands at a reasonable 7.4 while the current yield is at 6%.
Source: BT Group Plc
BT Group share price tends to move along with the wider market. Over the last six months, its share price dived from 190p to 115p, a drop of nearly 40 percent. This is due to:
- Market decline – especially in the autumn when investors panicked over a surge in energy prices and interest rates
- UK ‘Mini Budget’ debacle – which caused interest rate to spike and pension funds to dump holdings and lower asset values
- Government review of Patrick Drahi’s holdings – investors sold ahead in case he is forced to liquidate the large BT holdings
However, BT is oversold after such a massive decline, and a counter-trend rally is currently underway. Prices have rebounded from 115p to 128p. A further rally from here is not to be ruled out.
Years of underperforming the market has made the investment community cautious on BT Group. About half the analysts are saying ‘Hold’ or ‘Market Underperform’.
Among the 18 analysts compiled by one media (Financial Times) the median price target is around 175p, thus offering a 30-40% percent upside from BT’s current share price of 125p.
The current BT (LON:BT.A) share price is 133.45p which is a change of -1.2 or 0.89% from the last closing price of 133.45 with 28,645,015 shares traded giving BT a market capitalisation of £13,253,182,929. The most recent daily high has been 134.45 and daily low 129.95. The BT share price 52 week high has been 201.4 and the 52 week low 110.55. Based on the most recent BT share price opening of 133.45, the current BT EPS (earnings per share) are 0.17 and the PE (price earnings ratio) is 7.75.
Pricing data automatically updates every 15 minutes