BT Group: Something still has to give

BT’s choices have been getting more and more limited over the last couple of years.

The group has inevitably tested the patience of investors again with a break in the ‘progressiveness’ of its dividend policy, but BT’s choices have been getting more and more limited over the last couple of years. The cumulative unforeseen dent in its 2016 financial year has risen to £1.3bn. Note the group is now anticipating the hit from “inappropriate behaviour” in Italy at £546m, having assessed it as £15m higher than the initial sum. BT is also expecting to pay another £342m in total as a result of Ofcom’s investigation into “historical Deemed Consent practices” with telecom clients: a £42m Ofcom fine and an estimated £300m in compensation. Then there’s the initial £300m impact from ebbing UK government contracts, and another £300m over two years for revamping Global Services.

All this has concentrated management’s minds. But has it concentrated them enough? This financial year, the payout ratio will still potentially be higher than in 2016, when 53% of earnings were disbursed.

Capital expenditure in 2015/16 was £2.46bn against retained profit of £2.59bn. Q4 2016/17 capex alone was a tad north of £1bn, and widely expected to top £3bn for the year.

BT has pretty much made it clear that a significant reduction of its capex run rate (mostly directed at infrastructure maintenance and renewal) is a line it won’t cross. It said in January: “Lasting reduction in capital expenditure levels below certain thresholds could affect our ability to invest in mobile telecommunications networks (including additional spectrum), new technology and other BT businesses and so could have an adverse effect on our future growth and the value of radio spectrum.” That sounds like BT intends to defend its unique position as gatekeeper and proprietor of Britain’s communications infrastructure more fiercely than it will defend the dividend policy.

With adjusted revenues excluding transit broadly flat and forecast by BT to remain so in 2017/18, internal and external pressure for a harder look at the dividend policy will mount. The group said on Thursday that its “underlying dividend policy remains unchanged” and is still “progressive”. But it acknowledges that the policy must be balanced against the need to invest, support its (massive) pension obligations, and keep the balance sheet strong.

We still think ‘something has to give’, but obviously has not done so yet. At the same time, we see little prospect that BT can progress from its state of low-to-no revenue growth, high asset finance costs and other chronic onerous expenditures.

For that reason, unless something radical happens in the C-Suite, the divisions, or indeed on dividends, we expect another lost year as regards BT shares, with the high around 350p in March the likely limit in 2017.

  • On a technical analysis basis, whilst it’s promising that the shares appear to be settling around their medium-term cycle low, we would not be confident in calling much upside from here for the next few months, or even for the rest of the year
  • Our weekly chart depicts the decline off around 15-year highs in late 2015-early 2016 and suggests the collapse continues to loom large in investor consciousness
  • Having recouped a large proportion of last June’s post-Brexit vote losses, it’s clear the scandal in Italy that fully emerged in January (see candle within blue ellipse) caused more damage in a single week for the stock
  • The 22% decline has walled off the shares and will do so until they can escape its virtual influence
  • Trend history (200-week and 50-day exponential moving averages as marked on the chart) are inverting and inverted respectively and given that the weekly chart is a glacial one, that inversion can be expected to deepen
  • Combined with momentum as measured by RSI drifting lower, the consolidation of the shares below 350p appears to have further to run
  • An initial break under 297p support will heighten the chances of the first real test of the 290p pivot line since it worked as a support in June 2013
  • Obviously a breach of the latter would be serious news given that the next swing lows that look in any way as strong as the bounce in January occurred at 272p in May 2013, or below that 213p in November 2012
  • A sustained break above 350p is what buyers need to happen for plausible prospects of the beginning of a recovery

WEEKLY CHART: BT GROUP PLC


Source: Thomson Reuters and City Index - click to enlarge

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