On 26 March, I wrote an article explaining why I think the BT Group (LSE: BT.A) dividend is insecure and at risk of a cut down the line.
The firm has a five-year financial record that shows operating cash flow per share has been falling, normalised earnings per share have been declining, net borrowings have been rising, and the dividend has been flat.
Not as cheap as it looks
That’s a poor record. I want my dividend-led investments to be supported by a record of rising cash flow and earnings, falling debt, and a dividend that goes up a bit each year.
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One of the things attracting investors to BT right now appears to be the cheap-looking valuation. But I’d argue the firm isn’t as cheap as a quick glance might suggest. The main problem is that rising pile of debt.
You can get a quick feel for the level of indebtedness by comparing the market capitalisation of around £20.5bn with the enterprise value of around £32.5bn.
Taking one from the other reveals net debt stands close to £12bn, according to the figures quoted on various stock research websites. You can get a more accurate picture by digging into the company’s latest financial reports, but the quick calculation is good enough to get a ‘feel’ for the situation.
With the share price at 208p, the price-to-earnings (P/E) rating stands at just over seven. But it rises to around 8.5 for the current trading year because City analysts following the firm expect earnings to fall. However, comparing the enterprise value with the operating profit for the year to March 2019 throws up a multiple just below 10, which makes BT less of a bargain than that P/E rating of seven suggests.
It’s a problem. In the year to March, the net debt figure was around 3.65 times the operating profit the company made that year. That seems a lot to me, and there’s a big pension deficit on top of that to worry about.
If I was running a little business – let’s say a corner shop – I’d be worried if it would take me almost four years of trading before my profits would be able to pay off all my borrowings, and only then if I didn’t spend money on anything else at all.
Vulnerable to deteriorating economy
Meanwhile, I don’t think we’re in the middle of an economic slump right now, do you? Yet, BT is suffering from falling cash flow and earnings. Despite a few clouds, the general economic sun is shining. Yet BT’s finances have been declining.
To me, there’s a high degree of cyclicality in the firm’s operations, which makes the company vulnerable to any future economic slump. Right now, BT ‘should’ be experiencing strong incoming cash flow and robust profits, which it ‘should’ be using to pay off its debts. If cyclical firms don’t make hay when the sun shines they could be in real trouble when the rain starts.
Last time BT’s share price bottomed out it was below £1. I think it could easily go there again, even after any future slashing of the dividend. So I’m avoiding the stock.
