BT(LSE: BT-A) (NYSE: BT.US)has been one of the FTSE 100s best performers over the past five years. Indeed, the companys shares have jumped around 190% since the beginning of 2010, excluding dividends.
Thisperformance has not been accidental. The company has aggressively chased growth opportunities, including diversification into the pay-tv businessand, as announced recently, BT is re-entering the mobile market with the acquisition of mobile giant EE.
However, over the past few years, while BTs income has grown, so has the companys debt pile and pension deficit and this is what concerns me.
Rising levels of debt
BT has never had a squeaky clean balance sheet. The company, due to the nature of its business, spends heavily on telecommunications infrastructure, which isnt cheap. As a result, BT has only reported positive shareholder equity assets minus liabilities in only two out of the past five years as liabilities haveexceeded assets.
For example, according to the companys most recent financial statement, at the end of September BT had just under 10bn in debt,1.8bn of cash and shareholder equity of negative 365m.
Whats more, a large part of the companys debt is related to its pension fund and paying this off is costing the company a lot of money.
Specifically, according to BTs 2014 annual reportbefore specific items, the group made a profit of 2.2bn. But after restructuring charges and pension liability repayments, the group made a loss of 196m.
Furthermore, even after hefty contributions over the past few years, at the end of March last year BTs pension deficit stood at around 1.7bn.And this figure could be about to change significantly, as the company will soon publish the results of anine-month long review of its 47bn pension plan. The last time such a review was conducted was three years ago.
Unfortunately, the most bearish analysts believe that the results of the review will show that the companys pension deficit will have exploded to 8.1bn, indicating that BT would need to make top-up payments of 700 every year, above existing payments of about 325m.
Cash crunch
So it seems as if BTs pension deficit is coming back to haunt the company and this could push the group into a corner. Indeed, BT can hardly afford higher top-up payments right now as the group needs funds to fight off Sky and fund the acquisition of EE.
In particular, BT needs to find around6.3bn in cash to fund the acquisition of EE, while the battle with Sky, for the rights totelevise the Premier League, could cost BTbillions. It really is crunch time for BT and with a weak balance sheet as well as the prospect of higher pension contributions, the company does not have much financial flexibility.
What about that dividend?
BT’s dividend yield of 2.8% is attractive but there are better opportunities out there. However, if you are considering buying into BT as a dividend investment, then I would strongly recommend that you readour guide to high-yield investing. It has been written by our experts at the Fool, and it gives you the lowdown on this crucial investing technique.
Want to learn more? Just clickon this linkto read “The Fool’s guide to dividend investing” — it’s available free and without obligation.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
