BT shares at ‘not unattractive’ levels but are they a buy?

A turn in the economic cycle looks to be one of the best hopes for BT Group (LSE:BT.A) shareholders after a City firm today resisted the chance to shift to a “buy” recommendation.

While Deutsche Bank said a poor summer had left BT shares at “not unattractive” levels, it thinks too many uncertainties exist for it to change its hold stance or price target from 145p.

The shares were as high as 160p in April, but the impact of stake building by Altice and spring’s 14.4% consumer price rises have faded, leaving BT shares as low as 112p earlier this month.

• Learn more: SIPP Portfolio Ideas | How SIPPs Work | Transfer a SIPP

Offsetting some of the disappointment has been last week’s £535 million payment of a 5.39p a share dividend, following on from February’s interim award of 2.31p. Shareholders missed out on three sets of payments in the pandemic period up to February 2022.

A sector-leading projected yield of 6.4% should appeal to income investors, although UBS has warned the dividend bill looks unsustainable amid a big jump in debt costs.

The Swiss bank said recently that BT is effectively borrowing more than £900 million a year to fund the dividend and pension deficit payments at a time of high interest rates.

UBS concluded the company has the right long-term strategy, but warned that near-term financials may be weaker than expected as the regulated Openreach division progresses towards its fibre rollout target of 25 million premises by 2026.

By 2031, BT expects that capital expenditure will be materially lower and the business more efficient as it benefits from a single all fibre network and lower staff costs in a digital world.

• BT and Lloyds Bank shares among these inflation winners
• FTSE 100 dividend stocks will pay out almost £16bn in September
• ii view: BT shares sat on a dividend yield of over 6%
• The Income Investor: two dividend stocks to grab before this trend ends

In the near-term, Deutsche Bank is concerned by the impact of rising broadband infrastructure competition on BT’s market share.

A rapidly growing number of alt-nets are building their own networks and Liberty Global, Telefonica and InfraVia Capital have formed a joint venture to roll out fibre to five million homes not currently served by Virgin Media O2’s (VMO2) network by 2026.

The government's focus on national security for specific sectors has also made it difficult for telecom billionaire Patrick Drahi’s Altice business to increase its BT stake much beyond the current level of 24.5%.

Deutsche Bank also sees the forthcoming General Election as a further risk event, adding that new CEO Alison Kirkby may choose to be cautious on guidance and returns once she takes over from current incumbent Philip Jansen.

• Global Economic Outlook: Rolling on or rolling over?
• Assessing the future path for global interest rates
• Don’t expect UK interest rates to fall in 2024

Overall, the City firm reckons there’s limited scope for shares to break out from their current range.

It adds: “The sector may help (telcos are typically attractive as the economic cycle turns) and Altice will soon be able to raise its stake again, but we expect newsflow from the alt-net and VMO2 quarters to be entirely unsupportive, though resilient UK inflation may assist on price rises next year.”