Telecommunications firm BT (LSE: BT.A) saw its stock dive 4% in a matter of two trading days in the past week. It’s now down a staggering 86% from all-time highs in late 1999.
This level of volatility isn’t unusual for one of the most traded stocks on the London Stock Exchange, but it might be a chance for me to pick up shares on the cheap.
I can see a few compelling reasons for me to open a position in the company.
Dividend returns and share price growth
The BT share price peaked during the dotcom boom in 1999. Investors were piling in, dazzled by the potential of the nascent internet. The stock crashed shortly after and never recovered, with today’s share price still down 86% or so from those highs.
A return to those levels looks unlikely. In fact, I think this £14.8bn telecoms business operates in too saturated a market for any further rapid growth, which means I doubt I’d see my shares increase in value.
On the other hand, the company offers its shareholders an excellent annual yield of 5.43%. That’s among the highest dividend return I could get from any FTSE 100 company. To put it into perspective, even with rising interest rates, I’d receive only 2%-3% annually from most Cash ISAs.
If I could rely on a £543 annual payout for each £10,000 invested then I’d be pretty happy. And with the exception of 2020 due to the pandemic, BT has offered regular and generous dividends going back decades.
The stock looks cheap too. A price-to-earnings ratio of around eight compares very favourably to the FTSE 100 average of 14 and the UK telecoms sector of just over 17. All else being equal, I’d expect the share price to grow towards the industry average, which would net me more returns.
The big problem here is that, in this case, things are most definitely not equal.
Debt the size of Iceland
The elephant in the room with BT is its eye-watering debt pile – the company currently owes around £19bn. That’s roughly the same as the GDP of an entire country like Iceland.
It’s even £5bn more than the firm’s own market cap. If management wanted to give the company away for free, then the new owners would be billions worse off.
Not all debt is bad, of course. But the reason for BT’s problems is a staff pensions deficit that the company hasn’t really got a handle on. And that deficit is like a leaky pipe. It will keep causing problems until it’s fixed. To emphasise this, the debt went up by over a billion in the last year alone.
What does this mean for me? Well, the dividends that look attractive right now could be reduced or axed to free up cash to deal with the debt. That makes it a risky play, in my book.
Am I buying?
So while there are positives about the company, the reality is that cheap dividend-paying companies are plentiful in Britain right now. The high debt levels mean I’ll be keeping a bargepole’s worth of distance between me and this stock.
The post Does the BT stock fall make it a no-brainer buy now? appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
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More reading
- BT shares or Vodafone stock? Which would I buy?
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- If I’d invested £1k in BT shares 5 years ago, here’s what I’d have now
John Fieldsend 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.