I’m buying BT2 Aug 2018 16:59
https://www.fool.co.uk/investing/2018/08/02/why-id-shun-this-ftse-250-dividend-stock-and-buy-the-bt-share-price/
I’m buying BT
I’ve been buying shares in telecoms giant BT Group (LSE: BT-A) this year. Although this FTSE 100 firm does face some challenges, I think it could be a good turnaround buy.
July’s first-quarter trading update showed that adjusted pre-tax profit rose by 3% to £816m during the first half. This improvement seems to have been driven by the group’s consumer business, where sales rose by 2% during the period and EBITDA profit rose by 10%.
BT says that this improvement was driven by growth in sales of expensive smartphones, and SIM-only mobile contracts, along with an increase in the number of customers now paying for the BT Sport television service. Operating costs stayed flat during the period, allowing the increase in revenue to flow straight through to profits.
A turnaround with legs?
Chief executive Gavin Patterson will be leaving the building later this year. Chairman Jan du Plessis took soundings from shareholders and decided that “a change of leadership” was needed to deliver Mr Patterson’s turnaround strategy.
I can’t help but agree. My view is that the CEO has been too distracted by BT Sport and has been slow to protect the group’s operating margin, which has fallen from 17.8% in 2014 to 13.3% last year. The company so far failed to take advantage of its scale, as the owner of the UK’s largest mobile and fixed broadband networks.
The good news is that Mr Patterson’s turnaround strategy should address all of these problems.
The new BT Plus service provides seamless high-speed internet across mobile and fibre broadband connections. And the £800m cost-cutting programme should deliver annual savings of £1.5bn after three years.
Jobs are being cut in some areas and added elsewhere. And the company has now agreed a pension deficit reduction programme that provides visibility on payments until June 2020.
Why I’m buying
These developments are all good news for BT shareholders, in my view. But there were two other factors that swung the decision and persuaded me to buy the shares.
The first was the appointment of City veteran Mr du Plessis as chairman. This South African businessman has an impressive track record of turning around big companies. Most recently he led miner Rio Tinto from 2009 until 2018.
The second factor was that I thought the shares were starting to look too cheap. Even in its present condition, BT is expected to generate normalised free cash flow of between £2.3bn and £2.5bn this year. That values the shares at roughly 10 times free cash flow, which looks tempting to me.
Income investors will probably be tempted by the 6.6% yield that’s currently on offer. Personally I think there’s a good chance this payout will be cut by Mr Patterson’s replacement, to help fund pension payments and debt reduction.
But with the shares trading on just 8.8 times forecast earnings
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