Tuesday 6 August 2019 12:06 pm Interactive Investor Talk

No respite for BT investors as shares sink again

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By Graeme Evans from interactive investor.

BT shares continue to fall after first quarter results do little to dispel fears over its dividend.

After a torrid year for followers of Britain’s best-known stocks, first quarter results from BT Group (LSE:BT.A) have done little to ease their fears that the telecom group’s dividend is next for the chop.

While last week’s figures were largely as expected, they included another pledge that BT fully intends to play its part in accelerating the Government’s roll-out of full-fibre broadband, which PM Boris Johnson now wants country-wide by an earlier than expected 2025. 

Achieving this engineering feat is certain to put BT’s dividend under strain, although at May’s annual results the group announced an unchanged pay-out of 15.4p a share and said it was minded to pay a similar level in the current year given the outlook for earnings and cash flow.

But shareholders were told at the company’s subsequent AGM in July that reducing the dividend in order to accelerate the broadband roll-out was on the table, alongside other options such as cutting capital expenditure, or cost savings and higher borrowing.

CEO Philip Jansen said that the company was confident of taking further steps to stimulate investment, without providing specific details.

Jansen, who took the helm earlier this year, added:

“We are ready to play our part to accelerate the pace of rollout, in a manner that will benefit both the country and our shareholders, and we are engaging with the Government and Ofcom on this.”

Shares have fallen by an additional 15 per cent since May’s full-year results, with the blue-chip stock down a further 4 per cent in the wake of last week’s figures. They now trade at the lowest level since late 2011, despite some favourable price targets among brokers.

The fears over its dividend come after the pay-outs were reduced this year at market heavyweights Centrica (LSE:CNA), Vodafone (LSE:VOD) and Marks & Spencer (LSE:MKS).

As well as the uncertain investment outlook, investors are also likely to have been spooked by the potential implications of Jansen’s comment that in order build a better BT the company will need to be “even more competitive”.

He said:

“We will continue to take decisive action, including on price, to further strengthen our customer propositions and market position, both to respond to any short-term market pressures and to capitalise on longer-term opportunities.”

Analysts at Jefferies said this highlighted BT’s determination to defend retail market share and may be directed at recent reports of Virgin Media planning new initiatives.

They added:

“It may also signal, in our view, that management really is playing the long game in consumer, rebalancing pricing for future competitive benefit, rather than aiming to reveal forecast upgrade potential in the near-term.”

Jefferies said last week’s 1 per cent fall in adjusted earnings to £1.96 billion was 3.7 per cent stronger than consensus, but that this looked to be a “low quality” beat due to the benefit of items in the “Other” column.

Consumer earnings fell 5 per cent to £588 million and were slightly weaker than expected due to a number of headwinds, offset by a better performance for the Openreach infrastructure division.

BT said free cash flow of £323 million was down 36 per cent, reflecting increased capital expenditure and higher interest and tax payments.

Among key strategic developments, BT said its EE division had successfully launched the UK’s first 5G network in six cities during the quarter. The roll-out of fibre-optic broadband by Openreach is connecting 20,000 premises a week with 267,000 in the quarter taking the ultrafast total to 3.7 million so far.

Jefferies has a price target of 325p, while Morgan Stanley has an equal-weight rating at 230p.

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