Is BT Group a stock market gem at 138p?

In hindsight, we all know that the Rolls-Royce share value between 2020 and 2022 was a inventory market cut price. So, it stands to cause that there are most likely different golden FTSE 100 alternatives staring us proper within the face.

Might BT Group (LSE: BT.A) inventory be one? Let’s have a look.

A worth lure

I first thought of BT shares just a few years in the past and I’m now glad that I didn’t make investments. They’ve fallen 62% throughout a decade and 15% in 5 years.

BT has lengthy been a worth lure. That is the place a inventory appears like a shiny cut price as a result of its value is low. However as a substitute of rebounding, it traps traders by staying caught within the cut price bin or falling even additional.

This may very well be for any variety of causes, comparable to poor prospects, underlying points, or repeated cuts to the dividend (which undermines investor confidence). I’d say BT ticks all these bins.

First, it’s working in a mature telecoms trade with low development prospects. There’s additionally lengthy been a large underlying debt problem, whereas its long-term document of rising the dividend is solely dreadful.

BT dividend per share (2005-2023)

Sensible traders see worth

Since I final thought of BT shares in April, they’ve soared by 32%. They usually jumped 6.2% to 138p as we speak (12 August) after it was introduced that Indian billionaire Sunil Bharti Mittal’s conglomerate would purchase a 24.5% stake from BT’s largest shareholder.

Commenting on the funding, Bharti mentioned: “BT has a robust portfolio of market main manufacturers, high-quality belongings and an skilled administration crew…BT is taking part in a significant position to develop entry to full-fibre broadband infrastructure for hundreds of thousands of individuals throughout the UK.”

This stake, valued at about £3.2bn, is clearly a optimistic improvement for shareholders. Apparently, the Bharti conglomerate hasn’t requested for a seat on the BT board, which is a vote of confidence within the turnaround underway by new CEO Allison Kirkby.

In June, Carlos Slim, the Mexican telecoms billionaire, individually paid £400m for a 3% stake in BT. So a number of trade veterans see nice worth right here. I’m now questioning whether or not I ought to get onboard too.

A FTSE 100 cut price?

BT’s income, the one factor it’s a must to admit is that it’s remarkably constant.

Regardless of this lack of top-line development, the inventory may nonetheless be a strong funding. That’s as a result of BT’s free money move is anticipated to enhance now that its large investments in increasing full-fibre broadband have probably peaked.

Certainly, the group sees normalised free money move reaching £3bn by 2030, up from £1.3bn final yr. That is very important as a result of BT nonetheless has a large web debt place of roughly £20bn.

In addition to paying down debt, this money may additionally assist a rising dividend. The ahead yield is at the moment 6% and seems well-covered.

In the meantime, the forward-looking price-to-earnings (P/E) a number of is round 7.5. That’s cheaper than each the broader FTSE 100 and BT’s peer group. So I can see why sector traders are licking their chops at a possible cut price right here.

Nevertheless, I can’t ignore BT’s debt pile when this exceeds its £13.8bn market capitalisation. It stays a giant concern, as does stagnant income development and rising competitors.

All issues thought of, I reckon there are higher alternatives elsewhere for my cash.