BT Shares Won't Drop Dividend, say Analysts

Morningstar equity analysts believe the stock market has overreacted to BT's problems and that the dividend is sustainable

James Gard 29 May, 2018 | 10:13AM

BT Shares Are Undervalued, Say Analysts

Shares in FTSE 100 telecoms and sports broadcaster (BT.) are more than 12% lower this month on concerns over its pension commitments and ongoing performance issues at its global services division.

The stock is now rated as five star by Morningstar equity analysts, which means they consider it to be significantly undervalued. BT is now the only European telecoms company covered by Morningstar with a five-star rating.

This month's share price fall means the company is trading 44% below their fair value estimate of 360p.

Analyst View: Allan C. Nichols, CFA

BT's stock price has been hammered due to issues and concerns regarding its underfunded pension. However, we believe the market has overreacted to these issues and that the fundamental value in the company is being overlooked:

1) The firm's acquisition of sports rights has been expensive, but these have helped to drive broadband subscriber growth and are beginning to generate revenue.

2) As the only UK operator that owns both fixed-line and wireless/mobile networks, BT has a relative advantage verses its competitors, strengthened by the acquisition of 4G mobile phone provider EE.

3) We recognise concerns raised by the pension, but we believe that BT will continue to generate sufficient free cash flow to cover its high dividend, invest in the business, and handle its underfunded pension plan.

4) The global services division continues to struggle, but this has become a much smaller part of the company due to the acquisition of EE and growth elsewhere.

5) The stock yields 7.6%, which we believe is sustainable. This means shareholders are paid to wait for the market to recognise the stock’s value. This is currently the highest yield in European telecom and higher than Verizon's (VZ) or AT&T's (T) in the US.

When BT last got into financial trouble, it slashed its dividend. The previous time, BT eliminated the dividend completely. We believe the market thinks this could happen again. We disagree.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
AT&T Inc33.91 USD0.38
BT Group PLC226.80 GBX-0.90
Verizon Communications Inc53.54 USD-1.62
About Author

James Gard  is subeditor for Morningstar.co.uk