After a stunning 2013 when its share price rose by a whopping 62%, 2014 has been a major disappointment for BT (LSE: BT-A) (NYSE: BT.US). Shares in the telecoms and pay-tv provider have fallen by 3% since the start of the year, although they are slightly ahead of the FTSE 100, which is down 6% year-to-date.
Looking ahead, though, the future could be much brighter for BT. In fact, investing in the company could help you to retire rich. Heres how.
Pay-TV Potential
Although traditionally a telecoms company, BT continues to evolve into a broader media entity. A key aspect of this is its move into pay-tv which, thus far, has proven to be a very expensive decision. For example, the company has paid vast sums of money for the exclusive rights to screen sports events such as Champions League football (which alone cost an eye-watering 900 million over three years), Moto GP and Premier League football.
While the exclusive rights to screen sports is a very costly endeavour in the short run, it should help to maximise BTs sales and margins over the medium to long term. Thats because it helps to attract and maintain a broader and more loyal customer base, which should boost BTs bottom line. In turn, this allows more investment in pay-tv, which means more customers and something of a snowball effect begins to take place.
While this could take many years to finally start paying off, BT appears to have the financial firepower to successfully compete with the likes of Sky even after its decision to merge with Sky Italia and Sky Deutschland.
Growth Potential
With the huge cost involved in breaking into the pay-tv market, its of little surprise for BTs short term growth numbers to be slightly disappointing. Indeed, in the current year, BT is expected to increase earnings by just 3%, with next year expected to show a marked improvement as the bottom line is forecast to grow by 8%.
Although BTs short term growth prospects are generally inline with the wider market, there is still capital growth potential on offer through a potential rerating of the companys valuation. For example, it currently trades on a price to earnings (P/E) ratio of just 12.6, which is lower than the FTSE 100s P/E ratio of 12.8. Furthermore, BT continues to offer a solid yield of 3.5%, with the potential to grow via a higher payout ratio in future years.
Looking Ahead
However, when it comes to delivering real share price growth, BTs move into pay-tv is set to be the game changer. Although it may take a little while to come good, for investors who have a relatively high degree of patience, BT could prove to be a winning investment. As a result, it could help you to retire rich.
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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.
