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With the BT Group (LSE: BT.A) share price up 58% in the space of the last 12 months, the long slide since late 2015 might really have been reversed.
And through all these years BT has maintained its focus on dividends. Covid brought a cut, but the annual payments are back on track.
With the shares on a rebound, we’re looking at a forecast dividend yield of 4.9% now. The 2024 dividend was raised 3.9% after normalised free cash flow came in ahead of guidance.
Bright outlook
In January’s Q3 trading update, CEO Allison Kirkby told us: “Benefits from our cost transformation more than offset lower revenue outside the UK and weak handset sales.” She added: “We continue to make progress towards becoming fully focused on the UK, with the sale of our data centre business in Ireland.”
“BT’s continued delivery means we remain on track to deliver our financial outlook for this year and our cash flow inflection to c.£2bn in 2027 and c.£3bn by the end of the decade,” concluded the boss. That sounds like plenty of cash to keep the dividend rising.
Full-year results for 2024-25 are due on 22 May. And if they show more of the same progress, this might be the FTSE 100 investment to beat this year. Earnings growth is predicted for the next few years. And I see a good chance of the share price success continuing into next year and beyond.
The analyst consensus echoes that optimism, with an average BT share price target of 195p. That’s a 17% gain on the price as I write on 25 April. It would raise the forecast price-to-earnings (P/E) ratio to 14. With further growth in earnings and dividends on the cards for the next few years, that might seems fair value.
Too much too soon?
Yet the problem I see is that the stock valuation does seem to take in all the optimism, but maybe not the risk. Sentiment has reversed for the better since Allison Kirkby took charge in February 2024, as it often does with a new boss. And I do think she brings a clearer focus to BT that the company had been lacking.
But she’s only been in the job for a very short time. And I’m reminded of how long it took Amanda Blanc to truly turn things round at Aviva.
The most bearish of analysts expect a price fall of more than 30%, to 112p. I think they might have their eyes on BT’s growing net debt pile. It was up again at H1 time, to £20.3bn. And the company is still paying down its pension fund deficit, with another £0.8bn in the period.
I expect BT will retain high debt for a very long time. But I just want to see margins improving and some effort being made to reduce it. Until then, I’ll keep away. But seeing how debt hasn’t impacted the dividend outlook, I can understand why some investors might be happy to overlook it and consider buying.
