- Telco unexpectedly increases full-year dividend
- BT also targets further £3 billion in cost savings
- Global business is no longer core to group strategy
- New boss looks for big jump in free cash flow towards end of decade
“When a share price is trading no higher than it did in 1984, it is fair to say that expectations are very low, and BT’s new boss Allison Kirkby is doing a fine job of skipping over a low bar with her first set of full-year results in charge,” says AJ Bell investment director Russ Mould. “Plans to cut costs, streamline the group and boost cash flow all read well, and the surprise increase in the full-year dividend to 8p a share from 7.7p reminds investors of the stock’s potential attraction as a source of income.
“Whether the share price bounce is the result of short covering by hedge funds, spooked out of their positions by the bullish talk and higher dividend, or genuine buying by converted sceptics remains to be seen, and the company and new boss both have much work to do. Allison Kirkby will also be keen to avoid falling into the trap that eventually caught one of her predecessors, Gavin Patterson, who over-promised on dividends and cash flow and ultimately left under a cloud after he had under-delivered.
Source: Company accounts. Fiscal year to March.
“The better-than-expected adjusted free cash flow figure for the year to March 2024 is a good start, as the outcome of £1.3 billion compared favourably to management’s guidance of £1.0 billion to £1.2 billion. That still represents no actual improvement on the year before, however, although management is targeting £1.5 billion in 2025 and £3 billion by 2030.
Source: Company accounts, management guidance for 2025, 2027 and 2030 given alongside 2024 results. Fiscal year to March.
“This is thanks to the combination of cost cuts and also a peak in capital expenditure, as Openreach moves toward its target for the roll-out of fibre to the home (FTTH) across the UK.
Source: Company accounts. Fiscal year to March.
“These projections are based on BT’s own, normalised free cash flow calculations, not the statutory numbers, and the audited figures do paint a slightly less positive picture, as free cash flow remains weak. However, lower pension contributions going forward (one clear benefit of higher interest rates and higher bond yields), and lower capital expenditure should help here, too.
Source: Company accounts. Fiscal year to March.
“Management clearly feel they are through the worst on both counts and therefore free cash flow will improve, even if growth looks set to be modest, at least in 2025. The FTSE 100 member is forecasting increases in sales and profits, using its preferred metric of earnings before interest, taxes, depreciation and amortisation (EBITDA), of 0% to 1% for the coming year, as it continues to grapple with the combination of fierce competition on multiple fronts, tight regulation and customers who are ready and willing to change telephony, broadband, mobile and TV content provider.
Source: Company accounts, Management guidance for 2025E given alongside 2024 results.
“BT’s decision to focus just on the UK and review the role of its global business reflects, in some ways, the retrenchment seen at Vodafone, which has sold its operations in several smaller countries, planned the disposal of its Spanish and Italian operations and proposed a merger of its mobile operations with those of Three in the UK.
“A slimmed-down Vodafone, with a stake in a larger UK business and a healthier balance sheet, could pose more of a competitive threat to BT and Allison Kirkby and her colleagues are taking the next step in their response, following on from the merger of BT Sport with Warner Bros. Discovery to create the TNT Sports joint venture. Both telcos are clearly preparing for the next phase of their battle to emphasise, ultimately, how investors must assess a company’s competitive position in its chosen markets (before they then move on to valuation) when they decide whether its shares may be worth buying or not.
“A company’s balance sheet is a key factor in its ability to compete and a lofty debt pile can be a burden, as the interest payments suck away cash that could be used to buttress and develop a firm’s competitive position through investment in product, services, marketing, research and staff.
“BT’s balance sheet is still far from pristine and perhaps the review of the global operations is designed to bring some improvement here, too, so the company can better address the multiple challenges it still faces in its domestic market.”
