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Hargreaves Lansdown investors are piling into BT shares! Should I join in?

Smiling white woman holding iPhone with Airpods in ear
Smiling white woman holding iPhone with Airpods in ear

Today BT Group (LSE:BT.A) shares are among the most popular with Hargreaves Lansdown clients.

According to the investment firm, BT accounted for 1.59% of all buy orders on its platform over the last week. This made the FTSE 100 firm the third-most frequently purchased stock.

BT’s cheap share price

I can see why market appetite for the telecoms titan might be hotting up. On paper it’s one of the most attractive value stocks on the Footsie today.

City analysts think annual earnings here will rise 3% in the current financial year (ending March 2023). This leaves it trading on a forward price-to-earnings (P/E) ratio of just 5.5 times.

BT’s also offers chunky dividend yields at current prices. Its massive 6.8% dividend yield sails above the FTSE 100 average of around 4%.

The business looks in good shape to meet payout forecasts. The anticipated dividend is covered 2.7 times over by expected earnings, providing a wide margin of safety.

Risk vs reward

However, BT’s share price could be considered cheap because of the range of threats posed to future earnings. Naturally investors expect more bang for their buck in reflection of the higher risks they’re prepared to accept.

The question, however, is whether BT’s shares are cheap enough to merit investment. Right now I’m not so sure.

A long UK downturn?

First of all, telecoms firm’s operations are highly cyclical. So with business confidence tumbling and consumers feeling the pinch, profits are in peril over the short-to-medium term.

This week Deutsche Bank commented that “headwinds to the UK economy will almost inevitably push the economy into recession, with global growth slowing, confidence deteriorating, and persistently high inflation and rising interest rates squeezing disposable incomes further.”

The UK faces a prolonged and deep downturn too as it deals with pandemic- and Brexit-related hangovers.

Spiralling costs

Meanwhile BT is facing a fight to protect its margins as inflation rockets.

Soaring costs caused its pre-tax profits to sink 18% in the six months to September. And so BT has hiked its 2025 cost savings target to £3bn, a £500m increase.

Balance sheet woes

The problem for BT is that soaring costs are adding pressure to its already thin balance sheet. Normalised free cash flow dropped 75% to £100m in its first fiscal half. And net debt rose more than £800m year on year to £19bn.

This is a huge worry given the vast investment in its fibre broadband rollout programme (BT has also hiked its capital expenditure target from £4.8bn to £5bn this year “due to higher fibre connections and inflation”).

Against this backcloth I worry about the company’s ability to keep paying big dividends beyond the near term.

The verdict

Telecoms businesses have a colossal opportunity as the digital revolution continues. Rising demand for broadband and mobile data could potentially light a fire under earnings.

However, BT’s share price has dropped 31% so far in 2022. And I think it could continue to plummet as the massive risks it faces intensify. With future dividends also in danger, I’d much rather buy other UK shares today.

The post Hargreaves Lansdown investors are piling into BT shares! Should I join in? 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 2022