The last time I looked at BT shares in any detail was 2012, and at the time[1] I wasn’t exactly gushing with enthusiasm.  I thought the company’s results were lacklustre, the valuation so-so and the yield unimpressive.  I didn’t invest.

So was I right to avoid BT and, more importantly, are things looking any better today?

BT in 2012 was a slow growth company with a mediocre valuation

Here are some of the numbers from my last review:

  • In September 2012, BT shares were trading at 221p
  • The company hadn’t grown at all in the previous decade
  • The yield was 3.8%, about the same as the FTSE 100 at the time
  • The PE10 ratio (my preferred measure of value) was 12.7, slightly lower than the FTSE 100’s

The company had consistently produced profits and dividend payments, but the dividend had been cut in the financial crisis and there was no obvious growth trend.

With such uninspiring financial results it was fairly valued at best, given a valuation and yield approximately equal to the wider market.

To put icing on the cake the company had fairly substantial financial obligations in the form of both borrowings and pension liabilities.

It’s no surprise then that I declined to invest, which means I missed out on the 80% plus total returns that BT shareholders have enjoyed since then.  So what happened to produce such good gains in less than 2 years?

From 2012 to 2014 the dividend grew and so did positive sentiment

Some of the gains came from the dividend.  With the yield near 4% in 2012, investors have received around 8% in dividends since then, but the remaining gains of around 75% have come from the capital side of things.

Again, this has been driven to some extent by the dividend.  In 2012 the dividend stood at 8.3p while today it’s some 31% higher at 10.9p.  The share price would have had to go up by 31% just to keep the dividend yield at that same 3.8%.

But that’s only 31%; where did the remaining capital gains come from (another 44% to be precise)?

The answer is improving market sentiment, or if you want to put it another way, expanding valuations.

Investors are happier about BT today than they were in 2012 and so they’re willing to accept a yield of just 2.7%.  To decrease the yield from approximately 3.8% to 2.7% you need to increase the share price by…

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