BT -- To Have And To Hold

Published in Company Comment on 12 May 2011

BT dials up some impressive numbers; where next for the shares?

It's often said that elephants don't gallop but if that's true (and they can reach speeds of 24 mph apparently!) then no-one seems to have told Ian Livingston, the CEO of BT (LSE: BT-A).

The man took the helm at the UK's largest telecoms provider back in June 2008 and under his stewardship, the company has managed an incredibly impressive turnaround -- which has been reflected in the recent share price action.

From a relatively recent low of 70p in March 2009, the shares reached and stand at 200p at the time of writing -- down a little on Thursday's final results for the year ended 31 March.

Of course, none of this is any great shakes compared to the ludicrous highs the company's share price managed back in the tech boom when market rationale seemed "not applicable".

Bottom line focus

The boss's main focus has been on reducing costs and staff numbers. And he has been singularly successful in this endeavour. The company has made huge cuts in costs over recent years, shedding thousands of jobs along the way and cutting billions in costs to help it compete -- though in the last year, the cost-cutting focus was far less on staff than on other areas of the business.

It looks like it has been worth it -- though the staff who lost their jobs may disagree. BT saw an impressive increase in profits of over 70% at £1.7bn, and made £495m in the fourth quarter alone.

And this came on slightly lower revenues; 4% down at £20bn. But that's what the people who own the company really want to see -- a focus on the bottom line through responsible business. And that's what BT has delivered under Livingston.

The danger now is that he'll be tempted away by another 'Premier League' company looking for someone to sort its overheads out and tighten things up a little.

Shareholders also want to see a decent dividend. This desire will be easier for the company to fulfil through its impressive free cash flow which was ahead of expectations at £2.2bn.


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What next?

BT says it will pay a final dividend of 5p, up 9% on last year, and giving a full-year payment of 7.4p.

The consequent 3.7% yield isn't the FTSE's best by any means, but it isn't half bad for such a monolith with simultaneous growth potential.

That potential comes mainly from its roll-out of BT's super-fast broadband service which Livingston says is one of the most rapid in the world as over 80,000 premises a week sign up.

A near three-bagger from a FTSE high-yielding stalwart is an impressive performance indeed for anyone timing their purchase well. The question now is whether it's time to sell for those fortunate enough to be sitting on a big paper profit. This will all depend on your time horizons and reasons for holding of course.

BT is no deep value play. Discount the intangible assets and you're into negative territory. Net debt was £8.8bn at the year end; a reduction of £467m in the year after the company poured over £1bn into its pension deficit.

But as a FTSE 100 essential stalwart of a share, its numbers and outlook look very impressive -- and the debt burden is a lot lighter than it was.

Given the prospective price-to-earnings ratio of under ten, a respectable yield, the defensive nature of BT's business with some simultaneous potential for growth, I would be more inclined to buy on any significant weakness offered by the market's vagaries -- and then to hold for a long time -- than to sell into equally temporary strength.

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harryjim 12 May 2011 , 3:39pm

I hold it with gritted teeth. It bombed after I bought it and I am waiting for a chance to unload it without loss. Not one I would buy for the dividend income either. There are better companies out there.

F958B 12 May 2011 , 4:00pm

Weighing up the various risks and potential rewards against the current share price, earnings, dividends, current market conditions and other similar companies, my analysis suggests that BT is fairly valued.

rober00 12 May 2011 , 4:58pm

I used to own this one but wih its still not inconsiderable pension deficit, I would not buy now!!!

jaizan 12 May 2011 , 10:01pm

I'm thinking of taking profits at this price.

shinygoldcar 12 May 2011 , 11:40pm

I think I decided to stay away from this because of the negative book value, never mind the tangible book value.

But this is good news for people like my dad, who has BT shares from when they privatised. I hope he gets some consolation out of the increased dividend.

eccyman 13 May 2011 , 6:36am

BT own an very valuable asset in the form of their network. The problem is that many seem to regard it as communal property.

I couldn't see a situation whereby if I wanted to start up a shop I'd be able to use the shelves at my local Tesco and setup my own till.

dunnmt 13 May 2011 , 9:52am

The pension deficit is under control and with a small increase in the FTSE then it will be gone.

eccyman 14 May 2011 , 4:00pm

Cost cutting at BT, as in any other company can be a risky affair. The bean counters just look at the number laid off and how much has been saved - do they ever consider the ongoing consequences for the business?

The staff laid off usually don't just go home and watch TV. Many end up working for rivals, some of the more enterprising one set up their own businesses - guess where they get their customers from?

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