5 Things You Should Know Before You Buy BT Shares

13th Sep '12 by UK Value Investor

8 comments 18966 reads

Shares in BT (LON:BT.A) are popular with many investors. It’s a big company; a market leader in a safe, steady industry which is relatively insulated from economic turbulence. Most of the time that’s the sort of thing I go for as well. Safe, steady companies, preferably with high yields and high returns without high risks.

So when a subscriber recently asked me for my opinion on BT, I thought I’d crunch some numbers to see how the shares stand up under closer scrutiny.

1. If you’re looking for a solid track record of growth, you won’t find it here

The first thing I like to see in a company is an upward trend in revenues, earnings and dividends over time. I don’t like to rely on investor sentiment to make money in the stock market; I prefer to invest in growing companies so that an increase in the share price is almost inevitable.

Alas, I was somewhat disappointed in BT’s longer-term track record, which you can see below.

Even ignoring the somewhat depressing 2009 figures, things aren’t looking good for BT. The results today are essentially where they were many years ago. That’s not exactly a stellar growth story, so it may be somewhat optimistic to assume high rates of growth in the future. This means that strategy number 1 – pick companies with long histories of consistent growth, goes out of the window.

2. The price to earnings ratio is nothing special either

If you can’t reasonably assume high rates of future growth, a second backup strategy is a share price re-rating. This sometimes happens when a company’s shares are very cheap relative to earnings, perhaps because of some short-term bad news which, given enough time, will pass.

The PE ratio today is around 12.3 which as most experienced investors will tell you, is nothing more than okay. In fact it may be less than okay given that the company shows no signs of reliable growth.

However, I prefer to look at today’s share price relative to the average earnings over the last 10 years. This can give a more consistent indication of a true value investment, and value investments are often the ones that get re-rated upward.

BT’s 10 year earnings average figure comes out at 17.2p, which gives a…

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emptyend

13th Sep '12

Curious.......I rub shoulders with quite a few people at BT - and they all seem to feel that, operationally, things are very much on the up!

IMO the biggest drags of recent years have been the pension position and BT's positioning in the broadband/TV market - and there are signs, I think, that both of these have been turned round. And of course they are confident enough to raise prices as they have announced today.

Rather as with the banks, turning things around at BT is like turning a supertanker - but I think that over-focusing on the recent history by inspecting the wake behind the tanker isn't necessarily the best way to see where it is headed.

FWIW I'd have BT as a core recovery play on the economy, along with some of the banks. Don't own any as yet though.

UK Value Investor

Hi ee, I hope you're right. If BT can sort themselves out then they'll make another good company to invest in. But I'd need to see them performing well for many years before I feel that I can trust their performance.

I'd need to see them performing well for many years before I feel that I can trust their performance

Perhaps so - but they've nearly quadrupled since 2009 and almost in a straight line.......with only one 20% pullback.

I wonder whether your moniker is a misnomer and UK Momentum Investor would be more appropriate ;-)

Thanks for the thread tho'..

I guess I could be the UK Momentum Investor, if you mean momentum of fundamental business performance rather than share price movements. But I'm talking about 'momentum' over a decade or more rather than a few years, although I'm not quite after Coke's century of growth. I'll leave that to Buffett.

But I'm talking about 'momentum' over a decade or more rather than a few years

One of the problems with that is that most companies suffer interruptions to their business performance at some point - particularly in the last 5 years or so, when there has been an unprecedented financial system shock that wrong-footed even some of the best managements.

IMO there is a need to distinguish between externally-generated challenges that were genuinely difficult/impossible to plan for (such as the financial crisis) and home-grown screw-ups. Personally I'd be cutting most company managements a good deal of slack in relation to the 2008-2010 period (except for the banks themselves, of course).

kenobi

14th Sep '12

BT is burdened with other issues, for example I met a chap working at bt in a fairly senior position who told me that BT had a longstanding agreement with the unions that there would never be any compulsory redundancies. Sounds to me like this makes it a sanctuary for people marking time until retirement, and that it would make it very expensive to get rid of people when needed. no doubt this adds to the burden on the pension funds, as these may be used as a way to tempt people to take early retirement (fine if there is a surplus, but effectively coming off the bottom line if it's in deficit),

G

loglorry

BT is a pension fund with a telecom's business no the side. I used to own BT but no longer do but I seem to recall the relative size of the pension fund (and its deficit) compared to BT's own market cap is quite staggering. BT is also saddled with a lot of debt and faces huge competition so operational performance "turning the oil tanker around" will not transform the share price.

If equity markets rally and bond discount rates rise (so future pension liabilities fall) then BT's share price will rise whether or not they perform well operationally. The market has known this for years and has priced it accordingly.

Log

BT is burdened with other issues, for example I met a chap working at bt in a fairly senior position who told me that BT had a longstanding agreement with the unions that there would never be any compulsory redundancies. Sounds to me like this makes it a sanctuary for people marking time until retirement

Whilst that might be true as a technicality, it is 100% certainly the case that in the last 5 years BT have been (very) aggressively "managing out" people who are relative poor performers. They have also pruned out long-term contractors. I know literally dozens of people who "used to work for BT". The para above was most certainly a fair criticism of BT 10 years ago - but it isn't now.

Similarly......

BT is a pension fund with a telecom's business on the side. I used to own BT but no longer do but I seem to recall the relative size of the pension fund (and its deficit) compared to BT's own market cap is quite staggering.

That used to be a well-justified one-liner in relation to BT. I may well have written it myself 5 or 6 years ago. But in fact BT has now finally got its arms around the problem of the pension deficit and halved it over the last 4 years, planning to eliminate it completely in a decade. And, if there is some sort of general recovery in the economy, BT actually represents a geared play on the upside, as the pension deficit will be eliminated even faster and revenue growth would flow through to the bottom line (because the debt is a fixed overhead).....hence this comment is wrong:

BT is also saddled with a lot of debt and faces huge competition so operational performance "turning the oil tanker around" will not transform the share price.

Of course if the economy doesn't recover then BT will struggle along with everything else but, as I said above, it is a (geared) recovery play on the economy if one is feeling optimistic.

5 Things you should know before you buy BT shares

1. If you’re looking for a solid track record of growth, you won’t find it here

2. The price to earnings ratio is nothing special either

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