My last call on BT shares was spot on. Here’s my view on the stock now

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The last time I covered BT (LSE: BT.A) shares, I noted that, considering its recent performance, one might benefit from buying the stock. It looked to me as if the market’s view of the business was far too pessimistic.

The group’s underlying fundamentals, I noted, weren’t as bad as the share price seemed to suggest. Since that article was published, almost exactly a month ago, the stock has risen in value.

I think this could be just the start of a big move higher for BT shares. 

BT shares: Improving outlook 

This week, BT published its figures for the first half of 2020. Management also put out its projections for the company’s full-year figures.

The group now expects earnings before interest, taxation, depreciation and amortisation (EBITDA) to be between £7.3bn and £7.5bn in the current fiscal year. That’s down from £7.9bn last year. For the firm’s first-half as a whole, revenue fell 8% to £10.6bn. 

These figures aren’t too good, but they’re much better than the market was expecting. The numbers suggest the firm’s EBITDA will fall 8% year-on-year. By comparison, BT shares have fallen around 50% year-on-year. 

In my opinion, these figures don’t make much sense. Yes, the group does have some problems and revenues are under pressure. However, the company remains the largest telecommunications business in the UK, and it’s making tremendous progress in reducing costs and rolling out new technology. 

The company reduced overall costs by £352m in the first half of its fiscal year. A lower-cost base should help BT recover faster when the economic recovery really starts to gain traction. The organisation is aiming to reduce costs by £1bn a year by 2023, and £2bn by 2025. 

The company also plans to resume dividends next year. Management is initially targeting a dividend of 7.7p per share. That would give BT shares a prospective dividend yield of 7.7%. 

Risks ahead

The group’s better-than-expected financial performance is only one part of the puzzle. BT is facing several other headwinds which could weigh on growth in the years ahead. These include rising competition in the company’s core broadband and pay-tv markets, as well as elevated pension and net debt levels. 

Nonetheless, while these factors shouldn’t be ignored, it looks to me as if many of the concerns facing the business are already baked into the share price. 

What investors aren’t prepared for, in my opinion, is a better-than-expected performance from the business. As such, if the group does manage to get its house in order, I think BT shares could produce large returns from current levels.

And, in the meantime, investors will be paid to wait. The stock’s prospective 7.7% dividend yield is around double the market average, and extremely attractive in the current interest rate environment. 

Overall, I’d still buy BT shares for the long haul at current levels. 

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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.

The post My last call on BT shares was spot on. Here’s my view on the stock now appeared first on The Motley Fool UK.

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