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BT - dividend suspended, rebased from 2021/2022

Sophie Lund-Yates, Equity Analyst | 7 May 2020 | A A A
BT - dividend suspended, rebased from 2021/2022

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BT Group plc Ordinary 5p

Sell: 131.60 | Buy: 131.75 | Change -1.60 (-1.20%)
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BT has decided to suspend the final dividend in response to the coronavirus pandemic and the need to invest in full fibre broadband and 5G in the UK. When the dividend is resumed in the 2021/2022 financial year it will be rebased to 7.7p per share, compared with 15.4p over the last few years.

BT's underlying full year revenue fell 3% to £22.8bn, reflecting the impact of regulation, strategic moves away from low margin products and declines in legacy products. Adjusted earnings per share fell 11% to 23.5p.

BT is not providing guidance for its coming financial year due to ongoing uncertainty associated with coronavirus.

The shares fell 7.2% on the news.

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Our View

BT has decided to shelve dividends for now. When the dividend resumes next year it will be at half the current rate. Management has taken this step because it needs to invest heavily in the next stage of its transformation process - disruption caused by COVID-19 is secondary but may have contributed to the size of the cut.

BT does expect some impact from COVID-19 on its business. BT Sport is expected to see lower revenue as no live sport is being broadcast at the moment, which is hurting both billing, pubs & clubs and advertising revenue.

The group also expects some insolvencies among its smaller corporate customers, and Openreach trading is forecast to suffer as upgrades are put off. However, the group's key revenue engines should keep humming along, and while management hasn't quantified their estimates we doubt coronavirus will disrupt plans too much. This could change if the situation becomes worse or we enter a sustained recession though.

The new transformation plan involves significantly modernising and simplifying BT's operations and product line. This includes things like digitising customer journeys and moving customers onto the new 5G and fibre broadband networks. Management thinks the plan will reduce costs by around £1bn each year by 2023, rising to £2bn each year from 2025. To achieve this, BT will need to invest an additional £1.3bn, spread over five years.

Constant investment is one of the realities of the telecoms business, as the massive infrastructure involved needs to be consistently maintained and upgraded. We worry that even if the new plan is completely successful, BT will keep needing to shell out more to keep itself functioning on the cutting edge.

Another drain on cash is BT's large pension deficit, which has been soaking up available funds for some time, and we think that trend will continue for some time. Add to that the debt pile, which cost £736m in interest payments last year and the demands on cash are considerable.

On the other hand, BT does have its attractions. Its mobile networks are broad and generally high quality, Openreach is attractive, unique and higher margin, and BT Sport offers something that customers can't get elsewhere. However, customers are also increasingly plumping for more up-to-date means of communication, and are sensitive enough to price to make it hard to generate attractive margins. The regulator will always want customers to get more for less too. That said, while competition is tough revenue is reasonably reliable as customers typically sign long term contracts.

Ultimately, while BT is a strong player, it's in a really tough industry. It needs to leverage all of its advantages if it's to satisfy the never ending investment demands and return to dividend growth. For now investors will need to make do with nothing while they wait.

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Full Year Results (figures on an underlying basis)

Full year Consumer revenue declined 2% to £10.4bn, and fell 4% in the fourth quarter. The group attributed the decline to a fall in voice only customers and to increased regulation, especially around international calls and mobile spend caps. Cash profits fell 5% to £2.4bn, reflecting similar dynamics. BT expects to see lower Consumer revenue next year thanks to the lack of live sport available.

Enterprise revenue for the full year fell 5% to £6.1bn and fourth quarter revenue fell 3%, as customers used less of BT's fixed phone lines. Cash profits fell 3% to £2.0bn, which reflects lower operating costs and divestments. The group has also made bad debt provisions for customers disrupted by COVID-19.

BT's Global business continued its move away from lower margin and legacy products. As a result revenue was down 8% to £4.4bn, but cash profits were up 5% to £634m. BT has renewed its agreement with Lloyds Banking Group, but expects lower order intake next year thanks to COVID-19 and fewer upcoming renewals.

Openreach revenues grew 1% to £5.1bn thanks to a higher rents in fibre-enabled products and Ethernet. However, this growth was offset by both regulated and commercial price reductions and higher compensation payments. Cash profits fell 3% to £2.9bn, due to higher business rates and salary costs.

Underlying net debt stood at £18.0bn, an increase from £11.0bn last year. This mainly reflects changes in accounting practices, without which net debt would only have been £500m higher than last year.

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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.