BT holds firm on dividend

Charging ahead with the upgrade of its Openreach network from older, slower copper lines to fibre, the telecoms giant is targeting 4m premises by 2021. With its 5G service now available in more than 20 cities, the group is planning to expand coverage to a further 25 towns by the end of the year. Excluding a £622m grant funding deferral under the broadband delivery UK (BDUK) programme, these ambitions pushed network investment upwards by almost a fifth to £936m.

The question remains as to how long BT can keep increasing investment in its network while maintaining its dividend. Balance sheet strain will only worsen as competition in both fibre and 5G grow. Under similar pressure, Vodafone (VOD) slashed its dividend earlier this year. For now, BT has opted to maintain its half-year dividend and expects the full-year payout to remain unchanged at 15.4p.

While that’s good news for income investors, it could well be a stay of execution. Higher capital expenditure, as well as £1.3bn in pension contributions, has sent net debt up 11 per cent to £12.2bn (excluding lease liabilities). True, the pension deficit (net of tax) has improved by 15 per cent, but it still stands at an incredible £5.1bn having required £1.26bn in deficit payments during the half. Free cash flow has swung to a positive £320m, compared with the first half of last year, but it remains to be seen whether the year-end total will cover the dividend. Bloomberg Intelligence analyst Matthew Bloxham also believes estimates of BT’s spending in the upcoming spectrum auction have been underestimated by as much as £600m, which could add to dividend pressure.

Bloomberg consensus forecasts put adjusted pre-tax profit at £2.91bn and EPS at 24.1p for the full year, rising to £2.97bn and 24.8p in 2021.