To cut or not to cut: that is, ostensibly, the question facing BT’s (BT) management team. Many investors appear to have drawn their own conclusions about the future of the telecoms group’s dividend; its shares are down by almost a fifth in the year to date, leading to a towering yield of 7.7 per cent. That’s despite BT keeping up the prior year’s 15.4p payout at the preliminary results stage in May; and the fact that, in the same breath, it said it expected to do the same for FY2020. Good news, at least in the immediate term, for income-seeking shareholders.
But the group also noted that while it intends to maintain or grow the dividend each year, it will continue to take various factors into account – including underlying medium-term earnings expectations and levels of business reinvestment, such as ploughing more money into fibre-to-the-premises (FTTP). The latter scenario, though hypothetical, should be taken seriously; BT revealed within its full-year update that it had already enhanced its ambitions on this front. It is now targeting 4m premises by March 2021 – up from 3m – and 15m by the mid-2020s, up from 10m (subject to the right conditions).
JP Morgan Cazenove noted at the time that it saw BT’s statement about the dividend as “positive, as it underpins the dividend in the near term, while leaving flexibility to adapt the policy to future strategic investment decisions, which could be deemed value accretive in the long term”. Analysts here said that “while in principle this suggests higher FTTP could trigger a dividend cut, in practice we believe BT is simply indicating it is one of several options available (alongside accepting higher leverage, rationalising overall capex spend and accelerating cost cutting)”.
Investment is important for the group to remain competitive and – all being well – could ultimately serve to improve its top line and earnings prospects. Chief executive Philip Jansen – who joined the group in February from payments behemoth Worldpay – noted within the latest numbers that BT’s aim is to deliver the best converged network, and to be the leader in both fixed ultrafast and mobile 5G networks. He explained that “we need to invest to improve [BT’s] customer propositions and competitiveness”, to “stay ahead in our fixed, mobile and core networks” and to ensure that the company is using the latest systems and technologies.
In terms of mobile, BT’s EE business successfully launched the UK’s first 5G service on 30 May, spanning six cities. It plans to expand coverage to a further 10 this year. Encouraging news, although there are spectrum acquisition costs to bear in mind – another drag on cash. And that’s before considering the group’s huge pension deficit. It contributed £2bn to its pension scheme in its last financial year. In turn, net debt rose by £1.4bn to £11bn.
Deutsche Bank recently turned bearish on the shares. It noted that it expects “a tough few months of newsflow” for BT, in relation to the funding of alternative FTTP operators including FibreNation and Gigaclear – as well as Sky’s possible support for such ‘alt-FTTP’ build. Analysts have cut their FY2022 and FY2023 cash profit estimates by around 2 per cent and 3 per cent, respectively, reflecting the “disruptive nature” of alternative fibre.
The broker has also raised capital expenditure forecasts by 5 per cent from FY2022, reflecting higher fibre build costs en route to achieving the targeted 15m homes by 2025. It follows that analysts have cut their normalised free cash flow expectations by 12 per cent from FY2022 – and they expect the dividend to be slashed to 10.3p in FY2021. Such a reduction would take the shares’ yield to 5 per cent – below the threshold for our Income Majors feature. Analysts at JPMorgan and Numis are not currently forecasting a cut.
