BT - very busy keeping the plates spinning

BT: I find this stock really tricky to assess. The pace of change in its industry is frantic and the entire landscape seems to be in constant motion. Much of this rises from the emergence of quadplay: the convergence of fixed line, mobile, broadband and TV. So BT has its arm’s length subsidiary Openreach digging the holes, whilst its “heritage” business sells you the use of the line to your house. The competition spend plenty of time crying foul over Openreach and implying home field advantage, thus keeping the regulator on his toes. Having had to ditch O2 in the early noughties BT now find themselves eagerly trying to buy back into mobile through the £12.5bn acquisition of EE, regulators willing. Finally they addressed the content issue through BT TV, which was a “why bother” offer until they chose to spend billions launching BT Sport and prising some of Sky’s beloved football offering away. Again, the whole process of Premier League football rights is contentious with many a thwarted party claiming a stitch up. All that is not to forget the significant contributions from Global Services and BT Business too. So BT has to manage all this, without falling off the tightrope, which is a mighty challenge.

In these annual results to 31^st March 2015, the current BT reveals revenues down 2%, with adjusted profit up 12% to £3.2bn as operational costs are relentlessly attacked. Eps are also up 12%, to 31.5p and there is a 14% dividend hike to 12.4p. The balance sheet looks strong with net debt coming down £1.9bn to £5.1bn, (helped by the recent £1bn share placing) against EBITDA of £6.3bn as £2.8bn of normalized cash flow was generated. Mind you a pension deficit of £6.1bn (net, IAS19) always looms over any praise for the balance sheet, but we have all got used to that now, with £875m being shoveled into the hole last year and £625m this year, towards a cumulative total of £2.0bn by March 2017.

Forward guidance is for further modest revenue growth in FY2016 and likewise in EBITDA, despite increased football costs from the launch of UEFA competition coverage. Another £2.8bn odd of cash flow is expected along with a £300m share buyback (v £320m in FY2015), whilst a 10% - 15% dividend increase is mooted. Consensus forecasts seem to (slightly meanly) expect eps to march time this year at 31.5p, so at 450p the PE is 14.3x. A mid-ish range dividend hike of 13% would take the dividend to 14.0p for a still well-covered yield of 3.1%. These metrics look reasonable value, but the shares have already more than doubled over the last three years. Given the industry backdrop of huge change, I wouldn’t rush to buy the shares just now, but this is a stock where changes of view may come with the seasons. (Neil Cumming^, 7^th May 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower