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The BT share price falls on Labour’s ‘free broadband’ promise. Here’s what I’d do

Paul Summers
Road sign warning of a risk ahead

Shareholders of communications giant BT (LSE: BT-A) received a shock late last night with the announcement that Labour, if elected, would part-nationalise the company in an effort to secure free broadband to all in the UK by 2030.

The party’s reasoning is that the creation of a new company — British Broadband — would help resolve the problems of slow internet connection, particularly in remote and rural areas, that pale in comparison to the speeds offered in other countries. It also estimated families would save £30 per month on bills.

According to shadow chancellor John McDonnell, this move would cost £20bn and involve nationalising those divisions of BT that are relevant to broadband: Openreach, BT Technology, BT Enterprise and BT Consumer.

Maintenance costs — expected to be around £230m a year — would be funded through a tax on technology companies such as Alphabet (the owner of Google), Amazon, Facebook and Apple. 

As part of this pledge, existing shareholders in the FTSE 100 firm would be compensated with government bonds. A promise was also made that pensioners with money invested in BT would not suffer financially as a result of this proposal. The actual amount received would be decided by MPs at the time the company is re-nationalised.

BT’s shares were down almost 3% as markets opened this morning, before recovering. Should Foolish investors regard this initial reaction as a reason to jettison their own holdings? Not in my view.

Difficult and expensive

Selling in a panic is never a great idea, especially if you identify as a long-term investor (which, here at Fool UK, we believe the vast majority of people should be). Moreover, there are already a few issues with the proposal as I see it.

First, the one-off £20bn cost mentioned — while more than the £5bn promised by Boris Johnson for improving broadband access — does look exceptionally modest considering the huge amount of money that would be required to upgrade infrastructure to offer the entire population broadband access for nothing. Indeed, even BT’s still-fairly-new CEO Philip Jansen has already said the cost would likely be around £100bn.

Aside from this, details on the ‘tech tax’ are also pretty sketchy as things stand and it can be presumed Labour would also face huge opposition from other telecoms providers that use Openreach.

Lastly, it’s worth remembering that 10 years is a very long time in the political world. McDonnell himself has labelled the plan “visionary“, suggesting to me that, despite the big fanfare expected when the party officially announces the pledge today, it wouldn’t be a priority if the party came to power next month.

Wake-up call

Notwithstanding all this, last night’s news is a reminder of the need to thoroughly review your portfolio at regular intervals to ensure it reflects your desired asset allocation (i.e. how your money is spread in shares, bonds, property, gold etc) and risk tolerance.

This is particularly the case if you rely on the chunky dividends many of the companies Labour has already earmarked for re-nationalisation, should it emerge victorious on 13 December (e.g Royal Mail, National Grid).

The fact BT wasn’t previously on its list of targets should be a reminder that nothing is ever guaranteed and that embracing diversification to some extent is a must, even if it means compromising returns.

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Paul Summers 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.

Motley Fool UK 2019