ii view: BT shares slump as cost cutting ramps up

This telecoms giant has fallen by more than a quarter year-to-date and now offers a forecast dividend yield of 6%. Buy, sell, or hold?

First-half results to 30 September

• Revenue up 1% to £10.37 billion
• Pre-tax profit down 18% to £831 million
• Adjusted profit (EBITDA) up 3% to £3.87 billion
• Net debt up 4% year-over-year to £19 billion
• Interim dividend unchanged at 2.31p per share

Guidance:

• Expects year ahead adjusted profit (EBITDA) of £7.9 billion

Chief executive Philip Jansen said:

"BT Group remains on the front foot in these turbulent times. Our strategy is working, we're executing against our plan and we're confident that we'll deliver our long-term ambition while underpinning economic growth in the UK.

"High-quality connectivity has never been more important for our customers and our products provide great value for money. We continue to drive ahead with our strategy designed to deliver consistent and predictable revenue and EBITDA growth, expand cash flow and underpin our progressive dividend policy over the longer-term."

ii round-up:

Telecoms giant BT Group (LSE:BT.A) today detailed an acceleration in broadband line losses and weakness at its corporate enterprise business as it finds more savings to combat rising costs. 

• Read about: Free regular investing | Opening a Stocks & Shares ISA | Cashback Offers

Adjusted for worker strike action, second quarter Openreach line losses rose to 49,000 from the prior quarter’s 43,000, with adjusted profit for enterprise falling by nearly a fifth. 

BT shares fell by more than 8% in UK trading having come into this latest announcement down by around a quarter year-to-date. Shares for Vodafone Group (LSE:VOD) are down by just under a tenth during 2022, similar to the FTSE All-Share index. 

BT raised its cost savings target by £0.5 billion to £3 billion by the end of its financial year 2025, as it pushed harder to battle elevated costs such as increased energy bills. Its staff pension deficit rose to £1.7 billion from a previous £1.1 billion given the impact of higher real gilt yields.

• Investors stunned as Federal Reserve issues threat in war on inflation
• Autumn Statement 2022 preview: how you could be paying more tax in 2023

The FTSE 100 company continues to expect full-year revenue growth, with adjusted profit (EBITDA) forecast to rise by around £300 million year-over-year to £7.9 billion. 

Revenue for the first half to the end of September rose 1% to £10.37 billion due to customer price increases, helping adjusted profit up 3% to £3.87 billion.

An interim dividend of 2.31p per share remained unchanged. Third-quarter results are scheduled for 2 February.  

ii view:

BT operates across the four divisions of consumer, enterprise, global and Openreach. Its three consumer division brands are BT itself, EE and Plusnet, while its enterprise business connects businesses and public sector organisations. The global division manages IT infrastructure networks for companies in over 180 countries. Its Openreach division manages its fixed network and physically connects homes and businesses across the UK.   

• Daily Trading Flash: 10 most-traded shares 3 November 2022
• 10 high-yield dividend shares with a great track record

For investors, a highly competitive environment remains, with rivals like Comcast's (NASDAQ:CMCSA) Sky and Vodafone fighting hard to win customers. Rising costs, as with industry more widely, are having an impact, relations with its workforce are not always smooth, while group net debt of £19 billion compares to a stock market value of under £12 billion.  

On the upside, BT is making product upgrades, with the build out of its Fibre-to-the-Premises (FTTP) network over a third of the way through, and the rollout of its 5G mobile coverage expanded to a further 14 new towns and cities during this latest period. Cost cutting initiatives are ongoing, while a sizeable share stake held by telecoms dealmaker Patrick Drahi continues to generate speculative interest.

On balance, and while there are clearly risks with BT shares, they do offer a forecast dividend yield of over 6%, so income investors at least are likely to stay interested. 

Positives

• Expanding fibre broadband and 5G network
• Attractive dividend yield (Not guaranteed)

Negatives

• Intense industry competition
• Subject to regulatory rulings

The average rating of stock market analysts:

Strong hold