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BT - Dividend flat, restructure announced

George Salmon | 10 May 2018 | A A A
BT - Dividend flat, restructure announced

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BT Group plc Ordinary 5p

Sell: 162.35 | Buy: 162.40 | Change -0.35 (-0.22%)
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Underlying full year revenue at BT was down 1% to £23.7bn, below prior expectations. This saw profits, as measured by EBITDA (earnings before interest, tax, depreciation and amortisation), come in at the bottom of the guidance range at £7.5bn, down 2% on last year.

The final dividend of 10.55p brings the full year amount to 15.4p, unchanged from 2016/17. BT says it intends to hold the dividend flat for the next 2 years. Up to these results, the policy had been 'progressive'.

The group also announced a wide-ranging review, which targets £1.5bn of annual cost savings, and thousands of job reductions.

The shares fell 8% on the news.

View the latest share price and how to deal

Our view

BT is in the midst of a turnaround.

With CEO Gavin Patterson describing the group as 'too complex and overweight', cost cutting is a major theme. A net 7,000 jobs are going.

BT will hopefully emerge as a leaner, more joined up business. Its focus will be two-fold. Running the attractive consumer-facing services we recognise as BT, and also operating the infrastructure behind the digital and communication-led economy we all want.

The group is starting to successfully bundle TV, internet and mobile contracts together. That means the first part of the plan is already coming together nicely. It's the second part where we've had a few false starts.

There's constant pressure to roll-out more high speed internet and drive prices down. That's great for the consumer, but BT is the one footing the bill. Regulatory moves to reduce prices mean potentially lower returns.

We're also seeing the business-to-business division struggle, with public sector revenues falling away. All the while the group's pension scheme continues to be a major drag on cash flows.

However, some of the problems are clearly of its own making. Misdemeanours at Openreach (essentially BT unfairly delaying Ethernet installations) have led to fines and compensation payments, while improper accounting in Italy has made a few dents too.

These headwinds mean plans for 10%+ annual dividend growth have been reined in. The group is now looking at a flat payout in the short-to medium term. Investors are unlikely to get any increases for at least 2 more years.

But when one considers the recent share price weakness has pushed the prospective yield up to around 7%, the shares don't really need to offer too much dividend growth. That's before we even consider the upside if Mr Patterson can get the engine firing again.

However, revenues and profits are both likely to trend down and the nature of the business means capital expenditures will be stubbornly high - likely to be around £3.7bn a year for the foreseeable future.

In the long-term, we think BT should be OK. However, investors shouldn't rule out things getting worse before they get better.

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Trading details

BT consumer saw average revenues per user rise 5% to £41.70 per month, driven by cross-selling, fibre growth and price increases. Despite an increase in costs, profits in the division rose 1% to £1bn.

EE saw revenues rise 4%, and with costs held flat over the year, EBITDA rose 17% to £1.4bn. The total BT Group mobile base stands at 29.6m, with its 4G coverage now stretching across 90% of the UK.

These improvements were more than offset by falling profits elsewhere.

While Openreach revenues were steady at £5.1bn, increased charges on network assets saw profits fall 4% to £2.5bn.

Profits in the Business & Public Sector division fell 7% to £1.4bn, with Wholesale and Ventures down 10% to £754m and Global services profits falling 12% to £434m.

While free cash flow came in higher than previously expected, at £3bn, this was driven by working capital movements. Net debt also rose from £8.9bn last year to £9.6bn.

Looking ahead, BT expects both underlying revenue and profits to be down around 2% in the coming year, impacted by regulatory price reductions in Openreach.

Along with results, BT also confirmed the outcome of its triennial pension review.

The funding deficit at 30 June 2017 is £11.3bn, with the increase from the 2014 valuation mostly due to a fall in long-term real interest rates.

The funding schedule includes contributions into the Scheme of £4.5bn by 30 June 2020, when the next valuation is expected to take place. Part of this is to be funded by £2bn of new debt.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.