Tempted by BT’s share price and dividend yield? Here’s what you need to know
At a glance, BT (LSE: BT.A) shares appear to offer a lot of value. The FTSE 100 stock has fallen approximately 50% in the last three yearsand, as a result, it now trades on a forward-looking P/E of 9.1, while offering a lofty dividend yield of 6.5%.
However, its generally not sensible to rush out and buy a stock just because its cheap and sporting a high yield. Often, when a stock is trading cheaply, it means there are some problems under the bonnet. With that in mind, heres what you need to know about BT shares right now.
One of the main issues that concerns me with BT is that the group just cut its interim dividend in November. It was only a 5% cut from 4.85p per share to 4.62p per share which certainly isnt drastic, but it doesnt exactly send a message of confidence about the future.
Management can talk about things such as positive momentum and a strategy that is delivering all day long. But, in my view, a companys dividend is the ultimate barometer of financial health and the future outlook. Put simply, a dividend hike suggests that management is confident about the future, whereas a cut is a bearish signal.
The recent cut also adds uncertainty to the outlook for the final dividend. Currently, City analysts are forecasting a payout of 15.1p per share for the year ending 31 March, down slightly on last years payout of 15.4p. Yet I certainly wouldnt assume this estimated payout is guaranteed, especially with a new CEO coming in on 1 February, who may have some different ideas about the way capital is allocated. If youre buying BT shares now, I think you should be prepared for another dividend cut.
Debt pile and pension
One reason the new CEO could decide to lower the dividend is to direct cash towards the companys huge debt pile. Net debt stood at nearly 12bn at the end of September, which is a large amount for a company of BTs size. If interest rates were to continue rising and debt-servicing costs increased, profitability could be impacted. This certainly adds risk to the investment case. Furthermore, theres the groups sizeable pension deficit to consider. Cutting the dividend (which last year cost the group around 1.5bn) could help the company get this debt and pension deficit under control.
Finally, dont forget Brexit there are a number of ways this could impact BT. For example, a hit to consumer confidence could affect the groups ability to hike prices, which would derail growth plans. A no-deal Brexit could also see BT lose lucrative EU contracts, which would mean a hit to revenue. A chaotic exit from the EU could also mean lower interest rates, which would have the effect of further inflating BTs pension deficit.
So, overall, theres a lot of uncertainty in relation to the investment case for BT at the moment. As such, Im avoiding the stock for now. The shares look cheap, but I think there are better dividend stocks in the FTSE 100 at present.
Of course, picking the right shares and the strategy to be successful in the stock market isn’t easy. But you can get ahead of the herd by reading the Motley Fool’s FREE guide, “10 Steps To Making A Million In The Market”.
The Motley Fool’s experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.