BT dividend pledge faces a call from reality

BT’s pledge to maintain a progressive dividend policy came on Wednesday, separate from Thursday's disappointing Q2 earnings. Unfortunately, the thread from results back to that pledge isn’t so easy to break.

BT in a holding pattern

Adjusted revenues fell some 1% below consensus compiled by the BT. And although underlying income (EBITDA) of £1.81bn beat forecasts slightly, it was still 4% lower on the year, dragged primarily by rising pension costs and ongoing softening of Global Services revenues. In short, BT remains in the holding pattern that followed measures to correct the Italy scandal and contain deterioration of public sector business. And whilst the dividend commitment was given in good faith, to honour it, the group will have to ignore financial headroom that is declining as pension obligations and capex imperatives rise.

Covered for now

Investors can therefore rightly wonder how credible it is to expect heedless progression of BT’s dividend. The free cash flow that must keep the dividend ‘covered’ or else, has been steady just short of £4bn since the middle of last year, but has been creeping lower as remediation costs and pensions bite. Q3 free cash flow was £689m, down 23%. A potential step higher in investments is also possible: BT shows signs of relenting in the face of official and external corporate pressure to go all in on fibre. Elsewhere, the pricing of sports rights is likely to become more lavish, not less.

No signal

With dividend talk crowding out earnings news on Thursday, CEO Gavin Patterson told the media that the group’s decision to set the interim payout at 30% of the full year sum did not signal a change in the group’s pledge on progression. The reality is that the commitment could turn out to be more pliable than BT intends, if pressure from other obligations increases and cash generation keeps drifting lower.

Lines down

Unfortunately for investors, BT group's share price chart continues to require little interpretation regarding the near-term direction. The stock's overarching trend has run counter to that of the FTSE 100 since early 2016, trading in a fairly consistent declining channel for almost all of that spell. The classic pattern of progressively lower lows stands to continue, until it doesn't. More helpfully, the current watch should be whether BT can trade above a low which tagged the lower bound of the channel early in July. It is quite close to Thursday's 267p low and the rate of BT's 21-day exponential moving average (red dashed line) at the time writing, 269p. Below those levels, look for the slide to continue.

Figure 1 - BT Group Plc. share price chart (daily intervals)

Source: Thomson Reuters and City Index