2014 has been a slight disappointment for investors in BT (LSE: BT-A). Thats because there was a significant amount of optimism heading into this year, with BT having taken the sports TV rights fight to the doorstep of Sky. Indeed, after a strong showing in 2013 (when shares in BT rose by 62%), BTs share price has risen by just 2% in 2014. Although this is double the rate of growth the FTSE 100 has managed year-to-date, it still feels like something of a let-down after 2013s strong performance. However, the future could be much brighter for investors in BT and its share price could rise by 27%. Heres why.
Long Term Potential
As alluded to, BT has shifted its strategy in recent years. Notably, it has decided to take on Sky with regards to the rights to screen UK sporting events, such as Champions League and Premier League football. This is very much a long term project, although BT seems to be making encouraging progress thus far. As a result of the investment in sports rights, BTs costs have risen significantly in the short term, with the Champions League screening costing a whopping 900 million over three years, for instance. As a result, it would be of little surprise to see BTs bottom line growth potential hit by such a large initial investment.
Despite such costs, BT is forecast to increase earnings by 4% this year and by 7% next year. Although only in-line with the growth prospects for the wider index, they show that BT is able to maintain its short term growth numbers as well as invest in future growth via sports rights. Indeed, investing in sports rights now means that BT is more able to differentiate its product from those of rivals, which could lead to increased customer loyalty, sales and, ultimately, higher profitability in the long run.
Clearly, BT is reinvesting heavily to generate long term growth. As such, it pays out just 43% of profit as a dividend. This appears to be rather low for a mature business operating in a mature sector. As such, a payout ratio of 55% seems very realistic and could strike a more favourable balance between the reinvestment needs of the business and an income for shareholders.
A payout ratio of 55% would equate to a dividend per share of 16.1p and, assuming BT continues to trade on the same yield as at present (3.3%), it would mean shares trade at a price of 491p. Thats 27% higher than the current share price and would represent a realistic target price for investors over the medium term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended shares in BSkyB. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.