Why I am buying BT

flyinkiwi10 Updated   
Thanks for viewing,

I'm not sure I have the time to include my full reasoning.

- June 2020 reported both revenue and EBITDA down 7% yoy, which is certainly less of a decline than a lot of businesses - and way less than the drop in UK GDP overall.
- Profitability at end of March 2020 was pretty good, and after reporting an interim dividend of ~4.7% (the interim dividend is 30% the size of the final dividend) they halted dividends for the 2020-2021 year. That is quite prudent, and the -7% revenue numbers reported months after that seems to suggest that the hit to profitability will not be too great.
- It is quite hard to get a handle on where we are in the overall correction since 2015, but recently, the share price appears to have completed an identifiable 5 waves (of some degree) that started in October 2018. This suggests we are due at least a correction of some degree (if not a change of trend).
- An ending diagonal has formed since March 2020, this could be a bullish sign. I often see such formations at the bottom of a commodity price cycle.
- There is bullish RSI divergence unfolding - when declining price is displayed as a series of higher lows on the RSI. This, if nothing else shows a slowing of the price trend and is often present before prices change direction.
- (its a secondary source) shows on 31 March 2020 EBITDA isn't that much lower as compared to when BT was at the top of the previous price trend - in 2015-16, when BT was worth over 500 (this was despite a major lease payment over 800m pounds in the prev annual report - which isn't paid every year). So earnings per share have dropped 30% but share price is down 80%? Seems to indicate value to me.
- They will not be paying dividends this year, which I like, it is a good idea in uncertain times. Better to re-emerge strong than to deplete oneself in lean times.
- Based on previous dividends - which are highly stable and reliable - they could be paying and over 15% return - so I expect price to go up in 2020 - early 2021 in expectation of the resumption of dividends.
- Very good dividend coverage ratio - I think only about 30% of EBITDA is distributed as dividends, so even quite large variations in profitability will still allow reinvestment in the business and for dividends to be maintained.
- I think Brexit fears are over-blown. Yes there are a number of stories that BT will lose some European contracts due to Brexit, and even if that happens, this will not represent a sizeable hit to profits.
- PE ratio is 5.67 - value investing normally recommends buying when PE is below 10-15.
- Price to book ratio is 0.66 - so the entire businesses equity and future profit stream are valued at less than 70% of just net assets. Seems to indicate under-valuation - especially for such a high dividend potential equity.
- Despite competition, they provide 37% of broadband and seem to do well against the competition in cellphone coverage.
- People still need their cellphone and Wifi is basically an essential in 21st century, whether you work from home or not. Most of their drop in revenue was due to lower economic activity in general - but the base-line revenue is quite solid.
- If you believe in the "new tech-based economy" (that has resulted in TESLA trading over 1200 times earnings) well Companies like BT will be the foundation of this, providing internet and communications infrastructure.

Medium-term I see the 0.382 fib retracement as a plausible price target at 250 (+200%). If FY 2019-2020 dividends are maintained after next year, that will still allow a 5% dividend to be paid, which is better than the average - currently 4.81% for the FTSE 100. Yahoo finance puts a fair value fr BT at 200 - so 250 isn't "pie in the sky".

Its definitely under-valued - so I will start to average in. Time horizon; buy in within the next 3-6 months and hold for 5+ years.

I guess I did have time lol
Oh, I forgot that when dividends resume they will be at 7.7p/share. But that is expected to form the basis of a progressive dividend policy. ~8% dividends based on present price and upside remaining in earnings and dividends. Still a good buy.


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