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BT’s share price is rising. Should I buy the stock now?

Edward Sheldon, CFA
·3-min read
Graph of price moves, possibly in FTSE 100
Graph of price moves, possibly in FTSE 100

After a long period of underperformance, BT (LSE: BT.A) shares are showing signs of a recovery. Yesterday, its share price jumped 6.5% on the back of news that its mobile business, EE, had won 80MHz of 5G spectrum. Meanwhile, over a 12-month timeframe, BT is now back in positive territory, up about 15%.

Is BT a stock I should consider for my own investment portfolio? Let’s take a look at the investment case.

Can BT’s share price keep rising?

One of the first things I look at when analysing a stock is the growth potential. I like to invest in companies I believe are almost guaranteed to be much bigger in five or 10 years.

Looking at BT, the growth story is unclear. Over the last three financial years, revenue has fallen 5%. The company’s top line is expected to decline this year and next too.

It’s worth pointing out that BT has made some moves recently to boost its growth. Earlier this year, it hired a top executive from Bharti Airtel in India to spearhead efforts to expand its digital services. The goal is to boost the group’s presence in high-growth areas such as cloud computing, artificial intelligence, and machine learning.

This is more than a leadership announcement, it’s an important statement of intent. 2020 saw a number of major BT innovations enter the marketplace but there’s opportunity to go much further,” said BT’s CEO Philip Jansen at the time.

This is certainly encouraging. However, I’d like to see some more evidence the company is actually growing.

Is BT a high-quality business?

After looking at a stock’s growth potential, I then focus on its ‘quality’. I like to invest in high-quality businesses that:

  • Have a strong balance sheet with a low amount of debt

  • Have a good dividend growth track record

  • Are very profitable, measured by a high return on capital employed (ROCE)

BT doesn’t score very highly from a quality point of view.

For starters, its balance sheet is quite weak. At 30 September 2020, long-term debt stood at £16.5bn while equity on the balance sheet was £12bn. That gives a long-term debt-to-equity ratio of 1.4, which is quite high. This is an area of concern for me.

BT’s dividend growth track record also isn’t great. During Covid-19, it cancelled its dividend, and isn’t planning to pay one this financial year.

Meanwhile, BT’s return on capital employed has averaged 8.7% over the last three years. That’s not terrible. However, it also isn’t brilliant. Unilever, for example, has averaged a ROCE of 22.9% over that time period, meaning it’s much more profitable.

Do BT shares offer value?

Turning to the valuation, BT shares certainly are cheap. Currently, the stock has a forward-looking P/E ratio of just 7.2. That’s well below the median FTSE 100 P/E ratio of 16.5.

However, cheap stocks are often cheap for a reason. In this case the valuation reflects the weak balance sheet and growth challenges the company’s facing.

BT shares: my view

Weighing everything up, I don’t think BT shares are a great fit for my portfolio. The stock’s cheap. However, the growth and quality aspects of the company concern me.

All things considered, I think there are much better stocks I could buy right now.

The post BT’s share price is rising. Should I buy the stock now? appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Unilever. The Motley Fool UK has recommended Unilever. 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