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Is it worth buying BT shares now they’re cheap?

Rupert Hargreaves
Screen of price moves in the FTSE 100

BT (LSE: BT.A) shares have clocked up one of the worst performances of all FTSE 100 stocks over the past five years. However, after the stock’s recent decline, the company looks cheap. 

But does this mean the shares are worth buying at current levels? They could be for investors with a long-term time horizon. 

BT shares on offer 

Investor feeling towards BT shares has been falling for some time. It is easy to see why. Sentiment about the business has deteriorated as the company’s earnings have stagnated. The firm has also recently been forced to suspend its dividend, and it’s drowning in debt. 

Still, despite these issues, BT shares have some attractive qualities. For example, the company remains the UK’s largest telecommunications business. It’s unlikely to lose this crown as replicating the firm’s presence around the country could cost a competitor billions of pounds. 

It also has brand recognition. Most people in the UK have grown up with BT, and therefore, are more likely to trust the brand. And for fans of sport, BT Sport has the exclusive rights to some of the most important sporting events in the UK. 

These qualities give BT an edge over competitors. Nonetheless, they’ve not been enough to prevent BT shares from falling over the past few years. 

Are things about to change? 

The good news is that BT looks as if it is trying to change. The group’s decision to cut its dividend will free up cash for investment. Management is planning to spend billions over the next few years improving its service. Also, the company is rolling out new initiatives to improve relations with customers. This is something that’s been lacking in the past. 

These initiatives may help improve the company’s sales growth, but the firm’s debt will remain a problem. The group’s significant pension obligations may also continue to harm BT shares going forward. 

As such, BT’s reign as an FTSE 100 dividend champion may be over. If this is indeed the case, income investors may be better off looking elsewhere. 

That said, value investors who are willing to stick with the company through its transformation programme may be well rewarded in the years ahead if management’s efforts to rekindle growth start to pay off. BT certainly has the foundations in place to stage a significant recovery over the next few years, both from an operational and share price perspective. 

BT shares are trading at a forward price-to-earnings (P/E) ratio of just 5.6. That may suggest that the stock offers a margin of safety at current levels. The rest of the telecommunications sector is trading at an average P/E of 15!

Therefore, investors with a long-term outlook may benefit from buying cheap BT shares today as part of a well-diversified portfolio. 

The post Is it worth buying BT shares now they’re cheap? appeared first on The Motley Fool UK.

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Rupert Hargreaves 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