Is BT’s almost 7% dividend yield safe?

Are you looking for reliable dividend yields? Lets look at telecoms company BT Group (LSE: BT.A) to see if the firm can keep up that mighty almost 7% yield.

I reckon businesses are only really worth the cash they can generate from trading and from assets, whether that happens immediately or in the future.

It also takes cold, hard cash to pay a dividend, and thats a good reason to focus on cash-generation when trying to work out a firms ability to deliver a dividend income for its investors.

Cash and debt

Its worth keeping an eye on the level of a firms borrowings too. Is the company managing its debt well? is it falling, rising or flat? Debt competes with the dividend for the cash the firm generates. High borrowings means big interest payments, which suck the cash away so that not so much of it is available for the dividend.

Sometimes, firms pay dividends and keep pushing them higher even when they really shouldnt. If debts are high and theres no free cash left over after paying interest and reinvesting in operations, they shouldnt pay a dividend. But habits are hard to break and many directors seem to worry about damage to a companys reputation in the investment community.

But an unvirtuous circle can soon develop with debts rising even higher, maybe because the dividends are really being funded by more borrowings. If you see that kind of situation unfolding, I think its a big red flag and the forward dividend payments could be at risk.

If you are caught holding shares in a company that does trim its dividend, youll probably suffer a reduced income and capital losses from a falling share price a double whammy!

The news is a little worrying

BTs cash flow and debt figures are a little worrying. Operating cash flow has been falling and borrowings have been ballooning up.

Both those indicators are moving in the opposite direction to what wed want them to in order to support reliable ongoing dividend payments.

Year to March	2015	2016	2017	2018	2019 (e)
Operating cash flow per share	59p	59p	62p	50p	31p
Net borrowings (m)	5,811	10,847	10,665	10,725	13,279

With the third-quarter trading update in January, BT reported normalised free cash flowof down 11%, which it explained was mainly driven by increased cash capital expenditure. But trading was weak, and as for growth, forget it.

The recent dividend record looks like this compared to earnings per share:

Year to March	2015	2016	2017	2018	2019 (e)
Dividend per share	12.4	14	15.4	15.4	15.2
Normalised earnings per share	34	35.3	33.1	29.6	30.2

Growth in the dividend has stalled. The directors have been holding the dividend flat but normalised earnings are lower in the year to March 2019 than they were four years earlier. If earnings continue to decline, Id expect dividend payments to eventually follow.

BT looks like it has a cheap valuation, but City analysts following the company are not yet predicting any growth in earnings going forward. If that situation doesnt improve soon, I think the share price and dividend could begin to decline in the years ahead. I see the dividend as insecure.