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Should you buy BT Group as fears of a dividend cut rise?

Royston Wild
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2019 proved to be another painful experience for holders of BT Group (LSE: BT-A) stock. A mix of Brexit fears, rising competitive strain, and tension over possible renationalisation caused the telecoms titan to shed a fifth of its value.

If trading in 2020 so far is anything to go by, it looks like investors in the telecoms titan have plenty more to fear. Its shares have fallen 17% in price since January trading began.

And as I type, it’s within a whisker of hitting fresh multi-year troughs below 160p.

Another shocking statement

Latest trading details from BT have done nothing to improve buyer appetite, either. In fact it suggests that 2020 will prove another year of commercial upheaval.

It said that adjusted revenues had dropped 3% in the three months to December, to £5.8bn. Sales declines across the business have picked up as 2019 progressed, and a modest uptick in Openreach income failed to offset meaty falls across its consumer, enterprise, and global divisions in the last quarter.

A flailing top line isn’t all that’s plaguing the FTSE 100 firm today, though. The costs of its fibre and 5G rollout programme meant that capital expenditure rose 2% in the third fiscal quarter, to £2.9bn. These higher bills caused normalised free cash flow to collapse by £737m to exactly £1bn.

With capital disappearing out the door and income slumping, BT’s adjusted EBITDA fell 4% year on year to below £2bn between October and December.

Bad to worse

As if this wasn’t bad enough, BT crowned off a thoroughly depressing release by announcing that it’ll take a £500m hit over the next five years related to its high dependence upon Huawei hardware.

The government selected the Chinese tech giant to help it build the country’s 5G network in January. But this came with the stipulation that Huawei parts would be no more than 35% of the network. As a result, BT, which uses lots of the company’s gear, will incur huge costs from slinging much of it in the skip and replacing it with other hardware.

Dividends to get diced?

The threat of imminent renationalisation under a Labour government has died, sure. However there are clearly an abundance of other profits-crushing problems that threaten to keep BT’s share price under pressure.

Illustrating the huge competitive pressures that it faces, the company has just cut the price of its Superfast Fibre package to its lowest-ever tariff of £28.99 per month. This is further bad news for margins and has done little to give BT the edge, either (Sky has hit back by cutting the price of its cheapest superfast service to £25).

I have serious reservations over BT’s ability to keep paying big dividends, then. A weak revenues outlook, steadily mounting capex bills and a poor balance sheet aren’t the only reasons why I fear that broker forecasts of another 15.4p per share payout could fall flat.

For the year to March 2020 this predicted dividend is covered just 1.5 times by anticipated earnings, well below the accepted safety reading of 2 times and above. So I’m not interested in buying BT today or its 9.7% yield. I’d much rather buy shares in some other brilliant Footsie shares today.

The post Should you buy BT Group as fears of a dividend cut rise? appeared first on The Motley Fool UK.

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Royston Wild 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 2020