The BT share price (LON:BT.A) has been on a steady decline since hitting a high of £1.60 in April. With its dividend also now at risk of getting cut, it begs the questions whether BT shares are still worth holding on to.
BT shares started the year on the front foot as investors spotted a bargain after the stock fell 35% in 2022. Consequently, the BT share price shot up by as much as 40% earlier this year. Investor sentiment improved on the back of potentially higher revenues due to the approval of mid-contract price increases.
What’s more, Ofcom recently approved the company’s Equinox 2 full-fibre service. The regulator ruled that BT’s plan to reduce wholesale prices in order to encourage other broadband providers to use its high-speed full-fibre broadband isn’t anti-competitive. This should’ve sent the BT share price soaring, but instead, BT shares are down 20% since the decision due to several other reasons:
- Deutsche cites uncertainties surrounding Openreach fibre roll-out;
- Increasing competition from other network providers;
- A potential dividend cut to BT shares.
BT’s goal is to offer its Fibe to the Premises (FTTP) services to at least 25m premises by 2026. The firm is hoping to increase its FTTP customer base from 1.8m to anywhere between 6.5m and 8.5m by 2030. However, supply shortages surrounding optic fibre cables could undermine this ambition. This is due to the constrained supply of helium, which is a core element required to produce the glass fibre used in optic fibre cables.
The weakness in the BT share price can also be attributed to heightened fears of declining revenue growth and contracting margins for Openreach. The business segment accounts for almost half of the group’s profits (42%). Thus, hotter competition from the likes of Virgin, City Fibre, Hyperoptic, etc. could greatly undermine BT shares further. In fact, the competition is heating up as competitors are offering their services in locations that BT aren’t.
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BT Share Price (LON:BT.A)
Is it time to drop BT shares?
Bargain hunters will make the case that the recent drop in the BT share price presents a buying opportunity. This is especially the case when taking into consideration that BT shares are currently trading at a P/E of 6 with a dividend yield of 6.4% — both of which are extremely lucrative indicators. Nonetheless, it’s important to note that there are caveats.
As mentioned earlier, earnings could underwhelm due to concerns surrounding the conglomerate’s Openreach roll-out. This could subsequently affect free cash flow and force the board to cut its dividend by as much as half, UBS estimates. As a result, the BT share price has fallen further, with the investment case for the telecom giant weakening by the day.
This has been further exacerbated by the joint venture (JV) of BT Sport and Warner Bros. Discovery. The Swiss investment bank thinks that both analysts and BT’s management are completely discounting the impact the JV could have on cash flow, with UBS projecting up to a £200m hit per year to free cash flow. And given BT’s already large debt pile worth £18.52bn, such a substantial hit to free cash flow would make its current dividend unsustainable.
According to UBS, if free cash flow gets hit badly, the FTSE 100 stalwart would have to borrow approximately £900m over the next three years in order to continue funding its current dividend. And with its pension payments already in deficit and a massive debt pile, borrowing such a large amount when interest rates are so high isn’t going to please investors of BT shares.
Overall, the BT share price may indicate a bargain at its current levels. But, a combination of supply chain issues and a diminishing economic moat points towards a value trap. With a potential dividend cut still yet to be priced in by the market, there could be further downside for the stock. Therefore, it’s been no surprise to see UBS drop its price target for BT shares to £1.20 from £1.46, indicating that there may be better shares to buy.
Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.