The best way to look at BT(LSE: BT-A) (NYSE: BT.US) these days is to consider it as a long-term investment play. Its quarterly andfull-year results, which were released onThursday, just confirmed that view. Its stock currently trades at 450p, but could rise to 750p if you are patient enough to hold on to it for five years.
BTs fundamentals show that the business is in good shape. Its pension deficit weighs on its valuation, however.
Results didnt move the needle, but BT said today that it expects some revenue growth in the next twelve months and modest growth for earnings before interest, tax, depreciation and amortization (EBITDA) , which isnt ideal, but was expected following its pricey takeover ofmobile phone operator EE,althoughthe acquired businesshas not been included inthe projections.
Moreover, 2016 normalized free cash flow before specific items, pension deficit payments and the cash tax benefit of pension deficit payments will likelybe in line with trailing results at 2.8bn (for an implied yield aof 7%), according to BTs estimates,while a combination of dividends, which are forecast to rise between 10% and 15% in the next twelve months, and 300m of stock buybacks should contribute to value into next year.
What comes after that is just as important, though.
BT At 750p
The stock last traded around 750p in October 2000. For that year,revenues were slightly higher than now at 18.7bn, but free cash flow was lower and rapidly declined into 2001, while basic earnings per share (EPS) stood at 31.7p, which compares with adjusted EPS of 31.5p and reported EPS of 26.5p in 2014, according to BTs results.
BT reported a huge loss in 2001 (1.6bn), when EPS came in at -27.7p, but the stock comfortably traded above 500p even after the damage had become evident. Its dividend per share dropped from 21.9p in 2000 to 8.7p in 2001, which compares with a full-year proposed dividend of 12.4p a share in 2014 the implied forward yield stands at about 3.1%.
In September 2001, when it also became apparent that its corporate strategy with regard to thespin-out of its cellphone businesswasnt very easy to digest for analysts, BT managers did all they could to defend their decision, but the tech bubble burst and 9/11 contributed to a 55% drop in its valueduring the year.
Still, the stock traded around its mean of about 500p for the year well into the summer. It currently trades 50p lower than that level, and BTs corporate strategy has been praised by investors in recent times. BT still lacks growth, but if it manages to grow EPS at 10% a year, which is a distinct possibility, andassumingits forward p/e multiple remains constant at 16x,the shares will conformably hit 750p by 2021.
Rising dividends could contribute to a very solid performance over the medium-term.
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