Each time I think BT Group (LSE: BT.A) shares are finally on track for a genuine recovery, they collapse again. BT’s share price touched 200p at the start of 2022, but the stock has since fallen by 30% to around 135p.
This slump means that BT’s dividend yield has now risen to 5.7%. That’s well above the FTSE 100 average of 3.7%.
The only thing that’s stopped me from investing already is BT’s long-running lack of growth. However, I’m starting to think that the long-term potential of this business could be better than I thought. Here’s why.
A long-term bargain?
BT is currently spending around £5bn each year expanding its fibre and 5G networks. So far, this investment hasn’t delivered any obvious results. Revenue rose by just 1% during the first quarter of this year, while pre-tax profit dropped 10%.
However, CEO Philip Jansen says that by the end of the decade, BT should be generating an extra £1.5bn of surplus cash each year. This should be made possible by lower network spending and lower costs, as the company moves to an all-fibre network and switches off its copper network.
If BT can hit this cash flow target, it would double the group’s current surplus cash generation to £3bn per year. That could support higher dividends and a higher share price, in my view.
Tantalisingly, Mr Jansen says that BT has the potential to recover 200,000 tonnes of copper from its old phone network. That’s around £1.3bn worth of copper at current prices.
To be fair, Mr Jansen admits that the costs of this (big) operation are still being worked out. I wouldn’t get too excited. But it could be a nice little windfall.
Is the dividend safe?
One of my concerns about BT is that the group carries quite a lot of debt and has historically had a big pension deficit.
Servicing this debt and paying pension contributions will always take priority over dividends.
However, rising interest rates could change the picture slightly. Higher interest rates could help to reduce the pension deficit, as the income from BT’s pension assets will increase.
Unfortunately, rising borrowing costs might not be good news for companies that rely too heavily on debt. Although BT is a large, investment-grade borrower with reliable cash flows, my guess is that the interest rate on its debt is likely to creep up.
I don’t think BT will need to cut its dividend again. But I can see some risk that higher debt charges could limit the opportunity for dividend growth.
BT shares: what I’d do
I think CEO Philip Jansen is doing the right things. But BT is a mature business operating in a slow-growing market. Finding growth means adding new services or stealing customers from competitors. Neither of these things are easy or cheap.
On a long-term view, I can see some value in BT shares today. But the group’s big debt burden means that I’d like to see more evidence of progress before buying the shares.
BT shares look like an acceptable investment to me at the moment. But I think there are probably better choices elsewhere in the FTSE 100. I won’t be buying for now.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.