{"id":297,"date":"2016-09-01T11:23:33","date_gmt":"2016-09-01T10:23:33","guid":{"rendered":"http:\/\/frugalstudent.co.uk\/?p=297"},"modified":"2017-03-17T15:42:29","modified_gmt":"2017-03-17T15:42:29","slug":"buy-bt","status":"publish","type":"post","link":"https:\/\/frugalstudent.co.uk\/index.php\/2016\/09\/01\/buy-bt\/","title":{"rendered":"BT shares: A complete overview for 2017."},"content":{"rendered":"

Introduction<\/strong><\/span><\/h2>\n

If you’re looking for a complete overview of BT Shares then you’ve come to the right place!<\/p>\n

In this article, I’m going to discuss BT as a business, the wider telecoms market and whether BT shares are a compelling investment.<\/p>\n

On the lookout for some cheap dividend stocks after the Brexit flash crash I picked up some BT shares but they have since gone on to decline by around 18%.<\/p>\n

Whilst I\u2019m not a huge fan of the stock, especially after the accounting revelations, I\u2019m confident in holding it for its dividend and future potential.<\/p>\n

With BT shares down 36% in a year, could this be a buying opportunity?<\/p>\n

Why have BT shares dropped so much?
\n<\/strong><\/span><\/p>\n

As I’m sure most are aware, BT’s share price went down by\u00a0over 20% by the end of January and are down by around 36% overall this year.<\/p>\n

So, Why have BT shares gone down?<\/strong><\/p>\n

    \n
  1. The Italian accounting scandal<\/li>\n<\/ol>\n

    BT recently became aware of some historical accounting inaccuracies in their Italian arm.<\/p>\n

    Initially, they estimated that the cost of the inaccuracies would come in under \u00a3150m but after an independent audit the cost has tripled to over \u00a3450m.<\/p>\n

    Following this, the head of BT’s European division was relieved of his duties leaving BT’s reputation in Europe tarnished.<\/p>\n

    2. The end of big IT contracts<\/p>\n

    The previous Labour government embarked on an ambitious IT spending spree to upgrade the UK’s tech infrastructure.<\/p>\n

    These contracts included\u00a0improving internet speed and connectivity.<\/p>\n

    With these contracts now coming to an end, BT, especially it’s Openreach arm, will find it tough to replace this reliable and substantial cashflow.<\/p>\n

    The good<\/strong><\/span><\/h2>\n

    Quadplay!<\/strong><\/span><\/h4>\n

    I’m always quick to emphasise that stocks should be bought on current facts and valuations. One should always do their best to avoid ‘betting’ on future earnings and predictions.<\/p>\n

    But, recent moves from BT have gotten me excited!<\/p>\n

    BT recently bought the UK’s largest mobile network EE for \u00a312.5bn. A hefty price!<\/p>\n

    This acquisition puts BT in an enviable market position. The company now offers Telephone, Broadband, TV and Mobile<\/strong> and are focusing on rolling these products into one convenient package for customers.<\/p>\n

    We have already seen a glimpse of the future potential of these synergies by BT\u2019s offer of a free BT sport app for EE customers for six months.<\/p>\n

    Openreach – Clarity at last!<\/strong><\/span><\/h4>\n

    Regulatory issues surrounding BT\u2019s Openreach servicing branch have caused headaches for the company over the past few years.<\/p>\n

    But, the telecommunications regulator deemed a spin-off unessacary<\/a>, and BT have since negotiated a controlled and partial spin off of its Openreach arm.<\/p>\n

    Openreach will have its own board, and make its own investment decisions but BT will still retain control over Openreach’s budget and will remain the 100% owner of the cashcow.<\/p>\n

    This retention, along with quad-play, will allow the group to continue to enjoy competitive advantages over its competition in future.<\/p>\n

    The main attraction – dividend.<\/strong><\/span><\/p>\n

    One of the main attractions for me is BT’s dividend.<\/p>\n

    Currently yielding 3.55% (ttm) BT offers a decent dividend yield.<\/p>\n

    The company has been rebuilding their dividend since 2008 and have achieved a 5 year growth rate of 13.6%.<\/p>\n

    The payout ratio currently sits at close to 50% meaning that the company has room to grow its dividend even if results disappoint somewhat.<\/p>\n

    The company has managed to grow its EPS by 10% over the past 5 years meaning that dividend growth is sustainable in the medium term if EPS continue to grow by the same rate.<\/p>\n

    In fact, I expect synergy savings from the EE acquisition to start kicking in and increased customer retention to outpace the increasing costs of TV rights (although this is pure prediction).<\/p>\n

    \"Screen<\/p>\n

    The Bad
    \n<\/strong><\/span><\/h2>\n

    Football rights \u2013 a red flag?<\/u><\/strong><\/p>\n

    BT is currently up against Sky when it comes to bidding for football rights. The intense competition has lead to the costs of football rights skyrocketing!<\/p>\n

    BT recently spent \u00a31.8bn to snap up football rights to broadcast on BT sports including a \u00a3300mn fee for champions league football rights.<\/p>\n

    This has helped reduce the level of broadband customers switching to Sky but has come at a heavy price with the cost of football rights soaring 80% due to the bidding war.<\/p>\n

    My main concern here is the limited number of cost cutting measures that Sky and BT could employ in order to offset the rising costs of football rights.<\/p>\n

    With BT\u2019s debt pile already stacking higher, this continued bidding war is of major concern and is one it may well lose in the long term vs a mammoth like Sky.<\/p>\n

    Disruptors <\/span><\/h4>\n

    Moving forward, we may see services such as Netflix and Amazon prime begin to bid for TV rights that could drive costs higher again.<\/p>\n

    Amazon recently made a bold move in signing the trio of Jeremy Clarkson, Richard Hammond and James May, formerly of Top Gear for an exclusive online series The Grand Tour.<\/p>\n

    They are reportedly paying a hefty \u00a33million + per episode.<\/p>\n

    It’s inevitable that Amazon and its rivals will eventually move into sports broadcasting, pushing up the price of rights further.<\/p>\n

    With BT investing heavily into its quadplay stratergy for customer retention a loss of any single element could derail its stratergy.<\/p>\n

    The Financial Times has a great article about how the football rights battle is heating up; Further reading:\u00a0http:\/\/www.ft.com\/cms\/s\/0\/f5af4fde-5404-11e6-9664-e0bdc13c3bef.html#axzz4IzkHkEZV<\/p>\n

    Debt<\/u><\/strong><\/p>\n

    The acquisition of EE certainly did nothing to improve BT\u2019s already pressurized balance sheet.<\/p>\n

    In 2016 Net debt has increased by \u00a34,726m. This included the \u00a33,464m cash consideration as part of the EE acquisition and EE net debt of \u00a32,107.<\/p>\n

    What is \u00a0also worrying is the massive \u00a37bn pension deficit that BT is carrying. Although it\u2019s most generous of schemes, a relic of state ownership, \u2018The BT Pension Scheme (BTPS)\u2019<\/em> is now closed to new members, the BTPS still has around 35,000 active members, 197,500 pensioners and 69,000 deferred members.<\/p>\n

    A 16-year deficit contribution plan has been agreed. Under this plan, BT has made deficit payments of \u00a3875m in March 2015, \u00a3625m in April 2015 and \u00a3250m in March 2016. A further payment of \u00a3250m will be made in 2016\/17, bringing the total for the three years to 31 March 2017 to \u00a32.0bn.<\/p>\n

    This mammoth deficit isn\u2019t going anywhere soon and is a major concern going forward with a further \u00a35bn of payments still to make in order to close the gap.<\/p>\n

    With BT continuing to pour billions into this seemingly unfillable hole investors are right to be skeptical about future free cash.<\/p>\n

    \"Screen<\/p>\n

    \u00a0<\/strong><\/p>\n

    Should I buy BT shares? – Valuation
    \n<\/u><\/strong>
    \n<\/u><\/strong>What attracted me to BT shares was its valuation compared to the FTSE100, but this isn\u2019t to say that the stock is cheap.<\/h4>\n

    BT shares currently look attractively valued and appear a compelling investment. BT’s current 10 year p\/e ratio is 12.8 (excluding 2009 due to negative earnings). The company currently trades at a p\/e ratio of just 10.0 meaning the shares appear undervalued.<\/p>\n

    With the added value of EE and Quad-Play, I feel that BT has evolved rapidly as a company over the past two years and is now much better placed to tackle competitors as it was previously.<\/p>\n

    Previous valuations for BT do not reflect its current state.<\/p>\n

    This is evidenced by a widening of margins, despite TV rights battles. With further cost saving measures ahead and an increase in customer retention I am confident these margins can be maintained.<\/p>\n

    BT operating margins: (Source:GuruFocus)<\/p>\n

    \"Screen<\/p>\n

     <\/p>\n

     <\/p>\n

    Summary<\/u><\/strong><\/p>\n

    BT has placed itself in an enviable competitive position with the acquisition of EE.<\/p>\n

    EE and BT are both well known brands with good reputations. Rolling telephone, broadband, mobile and TV together allows BT to increase barriers to exit for customers, allowing increased customer retention.<\/p>\n

    Debt remains a worry for BT. With a seemingly never ending pension black hole and increased spending on football rights, investors need to watch the balance sheet closely.<\/p>\n

    BT\u2019s margins continue to expand, giving me confidence in the company\u2019s ability to successfully battle competitors.<\/p>\n

    The recent collapse of the share price have left BT shares looking very attractive with the dividend being maintained.<\/p>\n

    The fallout from the accounting scandal and the infrastructure will take years to fully pass but the dividend remains in place and I still feel BT is best placed in the market to ride out the current market troubles and competition spike.<\/p>\n

    I rate BT shares a cautious but risky buy.<\/p>\n

     <\/p>\n

     <\/p>\n","protected":false},"excerpt":{"rendered":"

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