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This bank says the BT share price is “overcooked”. I disagree!

·3-min read
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Shares in BT Group (LSE: BT.A) have been traded in London since December 1984. Following the privatisation of the UK telecoms giant, hundreds of thousands of retail investors became part-owners of BT. Even 37 years later, the BT share price is still closely watched by many private investors. And BT’s owners will be very happy with the whopping 75% gain the stock has produced since last Halloween.

Deutsche Bank knocks the BT share price

As I write on Thursday afternoon, the BT share price stands at 175.95p, down 4.45p (2.5%) on Wednesday’s close. This followed a negative report from City analyst Robert Grindle at Deutsche Bank (DB). In a review of BT’s sharp price gains since late February, DB argued that the shares were “overcooked“. In other words, the bank believes that BT stock has risen too far, too fast.

As a result, Deutsche Bank lowered its recommendation on the BT share price from ‘hold’ to ‘sell’. Grindle also reduced his price target for the shares to just 140p. That’s almost 36p — over a fifth (20.4%) — below the prevailing price. However, as with all broker notes, I’ll take this one with a pinch of salt. Furthermore, Deutsche Bank itself has a long history of poor management, disastrous decisions and huge fines dating back to the global financial crisis. So I’m going to disagree with Deutsche Bank on this call!

BT might just be on the bounce

On Thursday, 13 May, BT released its full-year results for 2020/21. Back then, I said I liked what I saw, with the BT share price at 160p. It has since gained almost 16p — a tenth (10%) — more. Here’s why I remain optimistic for the stock in 2021/22.

First, BT has restored its cash dividend, at an initial payout of 7.7p a share. That works out at a dividend yield of nearly 4.4% a year, about one percentage point higher than the wider FTSE 100 index. This cash payment should help to support recent gains in the BT share price.

Second, the three-yearly review into the BT Pension Scheme (BTPS) revealed a deficit of nearly £8bn as at 30 June 2020 (a funding level of 88%). But BT will reduce yearly cash contributions into the BTPS from £900m to £600m from July 2024. That’s a saving of £300m a year — another prop for the future BT share price.

Third, Ofcom’s recent Wholesale Fixed Telecoms Market Review has been completed and is expected to go easy on BT. Also, BT paid lower costs in the 5G spectrum auction than it anticipated. Lastly, the wider European telecoms sector is under-rated compared to global peers. Thus, further media/telecom mergers may follow. Both of these events could positively influence the future direction of the BT share price.

In summary, BT faces challenging times and therefore must evolve quickly and invest heavily to grow. Huge capital expenditures on full-fibre broadband will be partly offset by the government’s 130% tax super-deduction. For me, the BT share price is on a knife-edge at present. More good news might produce further gains, but any setbacks could seriously batter the stock. I don’t own BT shares right now. Even so, and on balance, I’d be a cautious buyer at current levels (and with BT worth £17.9bn today).

The post This bank says the BT share price is “overcooked”. I disagree! appeared first on The Motley Fool UK.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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