Image source: BT Group plc
I thought the last set of results for the whole year would have given BT Group (LSE: BT.A) share price has risen, after the telecommunications giant said it had reached a milestone.
It did for a short time, but the stocks fell apart again. Then the price dropped after this year’s H1 results on November 7. The lackluster response comes despite BT having calmed my nerves on my major dividend concerns.
What has to happen for BT’s value to start rising again?
Past high costs
I need to remind myself what the FY results controversy was about:
After passing peak capex on our full fiber broadband rollout and achieving our $3 billion cost and service transformation plan a year ahead of schedule, we have now reached a turning point in our long-term strategy. – CEO Allison Kirkby, May 2024
I saw the huge costs required for the rollout of broadband as risking potential hits due to two key factors: BT’s mountain of debt and its profit prospects.
The idea of separation
The budget forecast is 5.2% this year, rising to 5.3% in 2027. That’s not a huge yield, but there is one important thing in our favor. Forecast earnings should increase, 1.7 times in 2024-25, and up to 2.0 times in 2027 forecasts.
BT didn’t have to do what I fear the most, which is to cut its dividend, the way a competitor does. Vodafone made with a 50% cut. This year’s progress has increased my confidence in BT’s long-term profitability prospects. But what do credit forecasts look like?
The debt is rising
For the H1 results, I didn’t like what I saw. Total debt reached £20.3bn, despite those cost savings and slower capital spending. The board said it was mainly due to planned pension contributions of £0.8bn, which would do just that.
Forecasts put the figure at £19.9bn by March 2025, rising to £20.2bn by 2027. This shall pass”inflection point” ever have an impact on debt?
Outlook
In the interim, BT spoke “revenue growth and EBITDA growth before revenue, boosted by cost restructuring from FY26 to FY30“. That, it seems, should extend to “normalized free cash flow of circa £2bn in FY27 and circa £3bn by the end of the decade“.
Forecasts reflect that, putting free cash flow for 2027 at £1.96bn. I just wonder why no one seems to expect any of it to be used to make a major effort to reduce BT’s debt.
Share price
There is a consensus target of 202p for BT’s share price at the moment. It suggests a healthy 29% increase from today to get there. To know if that will be a reality, I think we may have to wait for the next FY results. It’s not due until May 2025, but the Q3 update in January could give us a clue.
I’m becoming increasingly fond of BT as a dividend stock. But I really want to see that inflection point turn into hard cash first.
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