The BT Group (LSE:BT-A.) share price is slowly recovering since its plunge last summer. But today, the FTSE 100 telecoms giant still offers giant yields, based on current dividend forecasts.
City analysts expect BT to raise the full-year shareholder payout to 7.74p per share in the last financial year (to March). This is up from the 7.7p reward the business shelled out a year earlier.
More steady dividend growth is being tipped for the next couple of years too. For fiscal 2024 and 2025, the business is tipped to pay dividends of 7.79p and 7.86p respectively.
As a consequence, BT shares yield a market-beating 5.4% and 5.5% for the next two years. This is far ahead of the 3.8% average for FTSE 100 shares.
But how realistic are current payout forecasts? And should I buy the business for my stocks portfolio?
Good coverage, bad debts
One key metric when analysing dividend forecasts is how well predicted rewards are covered by anticipated earnings. A reading above 2 times is generally considered to offer a wide margin of safety.
Pleasingly for BT investors, estimated dividends for this year and next are covered 2.4 times and 2.5 times respectively.
However, it’s also important to look at a company’s balance sheet when considering the robustness of dividend projections. And for me, BT’s financial weakness casts a huge cloud over the level of future dividends.
Net debts continue to tick higher and as of the end of 2022 stood at a whopping £19.2bn. This was up more than £1.5bn year on year.
Threats to BT’s dividends
The trouble for BT is that the costs of rolling out its ultrafast broadband is costing huge sums of cash. And it has a lot more expense coming its way. As of last month, the business had connected less than 40% of the 25m premises it plans to have wired up.
The company’s net-debt-to-EBITDA ratio stood at an uncomfortable-looking 3.3 times, as of December. This is a big red flag when it comes to future dividends. There are good reasons to expect it to continue climbing too. And that’s not just because capital expenditure will remain elevated for years.
I think earnings at BT could be under pressure for several reasons. Profits at the business are endangered by the difficult economic environment here in the UK. The business is also being pressured by high levels of competition. Revenues dropped 1% in the nine months to December on account of these issues.
Companies in the highly regulated telecoms industry are also under threat from changes brought in by Ofcom. In February, for example, the regulator announced it was launching an investigation into the elevated price rises operators are set to introduce this month.
The result of any probe could put a big hole in BT’s profits column. So could other regulatory action that may occur later on.
The verdict
Look, it’s possible BT could deliver solid long-term investor returns. As the world becomes increasingly connected, providers of broadband and mobile services like this will have a progressively important role to play. Profits could soar as a result.
Yet today, I still believe the risks of owning this FTSE 100 share outweigh the potential benefits. On balance, I’d rather invest in other dividend-paying shares right now.
This post was originally published on Motley Fool
