LONDON, UK - JUNE 20TH 2015: The homepage of the official BT (British Telecom) webiste, on 20th June 2015.
The BT Share price is up by 15 percent in the first two weeks of the year and continues to show signs of continued growth in the next few trading sessions. The company has also offered a 6 percent dividend yield, which is higher than the FootSie average. However, despite these fortunes, investors still remain undecided on whether they should invest in the company. Below is my fundamental analysis of the company and my recommendation.
BT Group (LSE: BT-A) has undergone a significant restructuring of its business, combining its global and enterprise divisions into a slimmer unit called BT Business in an effort to drive down costs and revive some of its most poorly performing segments. The move is expected to create £100mn in cost savings by 2025 by allowing the company to cut management and support roles as well as some product portfolios.
The merger is aimed at creating greater simplicity by removing unnecessary duplication and enabling the company to offer a single business serving both corporate and public sector customers. This follows several consecutive quarters in which the group’s enterprise division, which accounts for about a quarter of group revenues, performed poorly, with adjusted earnings before interest, tax, depreciation, and amortization dropping 23% in the first six months of the financial year, to £660mn. The global division, which serves foreign and multinational companies, was also a drag on group performance, with adjusted earnings before interest, taxes, depreciation, and amortization dropping 5% over the same period to £197mn.
The company has also set a target to generate £1.5bn of surplus cash each year by 2030, which could be used to underpin its commitment to raise dividend payments gradually over the coming years. The 6% yield on offer is higher than the FTSE 100 average, which has boosted the stock’s appeal as a passive income generator. However, the company’s high debt pile of over £19bn is a major risk, particularly with UK inflation running in double digits and the possibility of the Bank of England continuing to hike the base rate throughout 2023.
Additionally, high capital expenditure remains a headwind for near-term cash flows. Although the rollout of fiber broadband to replace the UK’s copper-based internet network is viewed as a positive for the company’s long-term investment prospects, it could take a while for this to translate into upward momentum for the BT share price.
Therefore, while the high dividend yield and the company’s efforts to cut costs and increase cash flows are positive signs, the high debt pile and the uncertain economic outlook will likely complicate its recovery chances in 2023. There is also a high likelihood that the economy and the looming global recession will impact the company’s fortunes significantly in 2023. This is why I remain neutral on the company despite the recent price surges. However, a trade above the 140p price level will indicate there is a bullish momentum behind the company and will signal a long-term bullish trend.
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