BT (LSE:BT-A) is up by half since the start of November. The BT share price is also in positive territory over the longer term, showing a 17% increase over the past year.
Clearly there has been some positive sentiment towards the name. But is it enough to keep the price moving upwards? Here I look at what might be driving the BT share price movement and what I plan to do now.
A number of factors have helped propel the BT share price in recent months.
Along with many shares it has benefited from a bounce since the vaccination programme began at the end of the last year.
I also think the fall in prices for some growth shares this year is causing many investors to reconsider value shares. BT, with its beaten down share price and relatively low price-to-earnings ratio, will have attracted attention from such bargain hunters.
There is also positive news on the business front. For example, the company’s mobile operator, EE, recently boosted its 5G spectrum rights after an auction run by the government. Telecom regulator Ofcom announced that it would not price cap full-fibre broadband from BT’s Openreach division. The company responded saying it would “build like fury”.
Challenges remain for the BT share price
Despite these positive developments, I think challenges remain for the company.
One of the biggest is its pension liabilities. For years BT has ploughed vast sums into plugging holes in its legacy pension scheme. The biggest UK private sector pension scheme is a significant drag on the company’s prospects, in my view. As circumstances change, such as lifespans expanding or investment returns falling, the forecast pension liabilities can rise again even though the company has already put more money in to shore up the scheme. Indeed, it stumped up £1.3bn last year alone to mitigate pension deficits. That puts me off investing in BT.
Meanwhile, another point weighing on the BT share price is dividend prospects.
The company has announced that it plans to restart dividends in the next financial year. That could mean a payout as early as this September. However, they may be well below where they were historically. The good news I mentioned, such as full-fibre broadband and 5G, comes with a hefty price tag. BT plans to invest £12bn in the full-fibre network, for example. While that may help profits down the line, such huge expenditure will likely hit profits in the next several years.
Having suspended dividends already, restoring them at a lower level may be easier for the company to do than trying to fund chunky dividends at the same time as a massive programme of capital expenditure.
Why I am not buying
BT continues to have some attraction as a utility-style business. Its full-fibre network, for example, should allow it to earn decent returns while the costs of entry to competitors to build such a network would be prohibitive.
But, as ever, the company seems full of potential while the realities are messier. Its pension liabilities alone could knock out years of good profits, for example – and still not be fully resolved at the end of it. With high capex planned I think shareholder returns could be limited, so am not investing in BT.
The post The BT share price has increased 50%. Here’s what I am doing now appeared first on The Motley Fool UK.
christopherruane 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 2021