Tempted by the BT share price? I’d buy this FTSE 100 dividend stock instead

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BT (LSE: BT.A) shares have had a terrible run over the last three years, losing over 50% of their value. As a result, the stock currently trades on a low forward-looking P/E ratio of just 8.4. However, despite this rock-bottom valuation, I’m still not convinced the shares are worth buying right now. Here’s why.

Low-quality stock

In my view, there are a number of factors that could keep BT’s share price depressed for a while yet. For starters, City analysts are downgrading their earnings forecasts for this year. Over the last month, the consensus earnings estimate for the year ending 31 March 2020 has declined by nearly 2%, while over the last three months, the consensus forecast has dipped by 4%. These earnings downgrades are likely to put downward pressure on the stock.

Secondly, BT’s balance sheet remains a problem. At the end of the last financial year, the group had net debt of around £11bn and a pension deficit of over £7bn on its books. Additionally, goodwill and intangibles sitting on the balance sheet amounted to £14.4bn. By contrast, equity on the balance sheet was just £10.2bn. These figures suggest that BT is a ‘low-quality’ stock.

Thirdly, I still have concerns over the sustainability of BT’s dividend. Dividend growth has dried up in recent years, and operating cash flow is falling. The high prospective yield of 7.2% suggests the market believes a dividend cut is on the horizon.

Weighing up all these factors, I think BT shares are best left alone right now.

I’d buy this stock

One FTSE 100 company I would be happy to invest my money in today is Legal & General Group (LSE: LGEN). It also trades at a low valuation and offers a high yield. However, I believe the outlook for the shares is far more promising than the outlook for BT.

Unlike BT, analysts are currently upgrading their earnings estimates for LGEN as recent financial results have been robust. Over the last one and three months, the consensus earnings forecast for the year ending 31 December has risen by 1.3% and 2.1%, respectively. This is a positive development and should help support the share price.

Legal & General has also lifted its dividend payout at a healthy rate in recent years, which suggests things are ticking along nicely. Looking ahead, analysts expect a 7% hike this year and an 8% hike next year. This dividend growth could put upwards pressure on the share price.

Additionally, news flow from the financial services giant recently has been positive. For example, earlier this month, the group announced it had just completed the largest-ever UK bulk annuity deal with Rolls Royce.

Legal & General shares were trading above 290p in late April, but they have pulled back recently amid market volatility. With the shares trading on a P/E ratio of 8.2, and offering a dividend yield of 6.5% right now, I think it’s a good time to be building a position in the stock.

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Edward Sheldon owns shares in Legal & General Group. 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.