The army of small shareholders in BT Group will be none too happy with the suspension of their dividend payments, even if they understand the reasons why.
Not only is it the first time that Britain’s biggest telecommunications group has scrapped a full year’s payout since it was privatised in 1984, but also when the payments resume in 12 months or so, they will be at half their most recent level.
If that wasn’t bad enough, the owners of O2 and Virgin Media last week agreed to merge their two British operating businesses, meaning that the competition for BT is about to hot up.
The next five or so years, moreover, are going to be an expensive period of hard graft as the group modernises and invests billions upgrading its legacy copper network to full fibre to get superfast broadband in 20 million homes.
BT shares, trading at ten-year lows, are extremely cheap, but that doesn’t mean they are enticing.
The company traces its history back to 1846 and the formation of the Electric Telegraph Company, the first to establish a nationwide communications network. Formerly part of the Post Office, it became British Telecom in 1980 and the shares were listed as part of Margaret Thatcher’s privatisation drive in 1984. Hundreds of thousands of individual investors bought the stock, today accounting for most of its near-830,000 shareholders by number and about 7 per cent of the company by value.
The latter-day BT, a member of the FTSE 100 index, operates four divisions. The consumer arm provides fixed line and mobile services to individuals, and the enterprise unit supplies businesses and the public sector. BT Global operates networks and IT infrastructure internationally, while Openreach provides connections to homes and commerce through its ownership of copper and fibre cables.
Paying a dividend of 15.4p a year ago cost BT just under £1.5 billion, so not awarding a final payment for its most recent year and suspending payouts for the year ahead will save the group a lot of money, probably about £2.5 billion. And when it comes back, the dividend is being rebased at 7.7p, likely to save the group a further £750 million.
It needs the money. The group is under pressure from the government to speed up the introduction of full-speed broadband connections across the nation and has a £12 billion plan in place that, if successful, will connect 20 million by the mid to late 2020s. This would generate substantial additional revenues but rather smacks of jam tomorrow.
At the same time, BT is finally modernising itself, shutting down legacy networks, making itself simpler and more efficient.
What complicates all of this is Liberty Global and Telefónica bringing together Virgin Media and O2, respectively the biggest supplier of cable TV and the second largest mobile provider.
The combination represents a serious challenge to BT, with its EE mobiles arm. What’s at stake is about much more than phones, though; it’s about convergence in which consumers increasingly buy all their communications services, including TV, from the same provider.
BT has invested heavily in screening live Premiership football matches, pitching itself against Sky in a battle it is by no means certain of winning. Having to take on a combined O2 and Virgin Media, which together plan to invest £10 billion over the next five years, is going to be an expensive exercise.
It may be that the BT that emerges from its planned modernisation a more effective operator, but for this observer the ride will be too long and too expensive. The shares, down a fraction at 106p, are not appealing.
ADVICE Avoid
WHY No guarantee that it will meet expensive promises and the competition is fierce
HG Capital Trust
The board of HG Capital Trust diverted from its usual practice yesterday and published extensive commentary alongside the updated valuation of its portfolio. While it’s true that this is sensible in such unusual times, this investment trust is also unlike the norm.
As this column previously noted, it should be a huge deterrent that the portfolio consists of harder-to-value private companies in the higher-risk technology sector.
However, as evidenced by its performance during the first quarter, the trust has a surprising resilience and a very strong track record.
Launched in 1989, the trust’s aim is to provide an easily tradeable way of gaining exposure to high-growth unlisted tech companies, and particularly those with plenty of scope for operational improvement.
It is a constituent of the FTSE 250 midcap index and benchmarks its performance against the FTSE All-share, which it has beaten when assessed over one, three, five, ten and 20 years.
The main worry for investors yesterday was that falls in the worth of the publicly listed companies that the portfolio is referenced against would lead to a drop in the valuation.
The trust said that trading at its 20 biggest portfolio companies — by far the largest of which is Visma, an accounting software and payroll management provider — held up well. Together they grew sales by 24 per cent and profit before tax and other items by 32 per cent over the year to the end of March.
With the tech sector less badly disrupted by the pandemic than others, this hopefully augurs well for more recent trading under lockdown.
However, with the trust applying a much lower valuation multiple to the portfolio in the light of stock market movements, the reported net value of its assets fell by 6.2 per cent over the period to £963 million, or £2.36 a share. In terms of total return, that’s nearly 19 per cent better than the FTSE All-share, which its shares have also outperformed.
The latest valuation means that the trust’s shares, up 3p or 1.4 per cent to 216p, trade at a discount of just under 9 per cent to the net asset value per share. With the dividend yield a reasonable 2.3 per cent, the stock is a good hold.
ADVICE Hold
WHY Surprisingly resilient portfolio in uncertain times
