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BT‘s (LSE: BT.A) price tag looks cheap at first glance. But is it so? My starting point in evaluating it is to compare it to its competitors on key metrics I believe.
On the price-to-sales ratio, BT trades at just 0.7 versus a peer average of 1.2. So it looks very neglected on this basis. The same is true for the price-to-book ratio, where it trades at 1.1 compared to a competitive ratio of 1.5.
However, the price-to-earnings ratio currently stands at 18.2 compared to an average of 16.4 for its peers.
To get more clarity about the potential understatement I used a discounted cash flow analysis. This indicates that BT shares are technically 61% undervalued at their current price of £1.42. Therefore, the fair value for them would be £3.64.
The unpredictability of the market may make them lower or higher than this, of course. However, it stresses to me how much value there may be left in the stock.
Good yield bonus too
BT shares currently yield 5.6%, which compares favorably with FTSE 100The current rate is 3.6%.
Investors considering £10,000 held in the company – the same as mine – could make £7,484 in dividends on this basis after 10 years. After 30 years this will rise to £43,446.
These returns are subject to two criteria. First, dividends are reinvested in stocks (known as ‘dividend compounding’). Second, the annual yield over time averages 5.6% – it could be lower or higher.
That said, BT’s interim dividend for 2024/25 rose 3.9% from 2.31p a year ago to 2.4p. If applied to all of this year’s budget allocations, the total would be 8.312p. This will subtract 5.9% from the current share price.
Analysts project this average rate of 5.9% will remain in place in 2025/26 and 2026/27.
Over time, a company’s stock price and dividend are driven by its profit growth. BT’s main risk in this context in my view is any fundamental problem in its infrastructure design. This can be costly to repair and damage its reputation.
However, analysts predict that earnings will increase by 16.5% each year until the end of 2027.
What does the core business look like?
In its full results for the 2023/24 financial year, CEO Allison Kirkby said BT had achieved a £3bn service transformation plan a year ahead. He also added that it has come to a point where the long-term strategy has to be changed.
Soon after, I bought shares for the first time. And on a larger scale, legendary investor Carlos Slim bought an initial 3.16% stake in the company. My guess is that you see the same unique value in the stock as I do.
BT’s results for H1 2024/25 saw annual revenue fall by 3% to £10.1bn. However, earnings rose by 1%, to £4.1bn. The difference came primarily from ongoing cost reductions. However, it highlights to me that BT can increase earnings even if revenue falls.
Net income is the total revenue generated from sales, while net income is what remains after operating expenses are deducted.
Will I buy more shares?
I am happy with my current weighting of BT shares.
However, without this I would buy the shares now based on their earnings growth potential. This should boost the share price and dividend over time, in my view.
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