Image source: BT Group plc
One of the star performers in the FTSE 100 index over the past year has been BT (LSE: BT.A). In just 12 months, the BT share price has soared 47%.
Sure, it has been a good year for the FTSE 100. The flagship blue-chip index has moved up 14% during that time. But with a performance over three times as strong, the BT share price has left it in the dust.
What has been going on – and might it make sense for me to buy some BT shares for my ISA even at this point in the game?
Long-term, revenues are in decline
At the operational level, it has largely been business as usual for the telecoms giant.
In the first nine months of last year, adjusted revenue fell 3% year-on-year. I do not mind investing in businesses with limited growth prospects, but it is always something of a red flag to me when a firm has falling sales revenues.
That can make it harder to swallow fixed costs – and a telecoms operator has plenty of those. BT revenue has been in long-term decline for years with the odd exception (such as 2024).
Shaking the value tree
The first nine months of last year saw adjusted earnings before interest, tax, deprecation and amortisation (EBITDA) grow 2%. All of that came from the firm’s Openreach division. Its consumer and business arms both showed year-on-year EBITDA declines.
I generally treat EBITDA with caution as a performance metric. Expenditures like interest and tax can be real cash costs. But in the first half, BT’s adjusted EBITDA grew 6% and reported profit was even stronger, up an impressive 29% year-on-year. So while we await the full-year numbers, it looks as if it was potentially a year of revenue contraction but real profit growth. That is consistent with a mature business milking its cash cow.
That helps explain why the BT share price has performed so strongly over the past year.
Investors have been running the slide rule over the business and weighing up some of its strengths, such as a still-powerful brand, large installed user base, significant pricing power and an Openreach business that is both valuable and has long-term growth prospects.
Add in the profits and BT may have looked like a bargain. Even now, after the share price rise, its total market capitalisation is only £15bn.
I don’t like the risk profile here
But the full picture is more complicated than that. For one thing, the business may only have a market capitalisation of £15bn, but that does not mean it is valued at £15bn. BT also has net debt approaching £20bn.
In the first half of last year, that grew rather than shrinking. Over the long term, a key risk I see (and that has put me off buying BT shares in the past) is that its legacy pension scheme could suddenly need more money put into it, eating into profits.
Indeed, the business said the net debt growth in the first half was “mainly due to pension scheme contributions”. Add to that uncertain long-term financial obligation a business in structural decline and I do not see the BT share price as a bargain.
At a price-to-earnings ratio of 20, I see it as pricey. I will not be investing.
