Last time I looked at BT (LSE: BT.A) shares, I thought they seemed too cheap to resist and I was a whisker away from buying them.
I wasn’t the only one who thought the share price was heavily undervalued. JP Morgan Cazenove had just called it “ripe for a major re-rating”.
The shares were trading at just 6.75 times forward earnings while the forecast yield was a blistering 7.36%. That’s exactly the profile of the FTSE 100 stocks I’ve been buying for the last year, and with some success. I felt there was an unmissable opportunity here. So what stopped me?
FTSE 100 fear factor
A big issue is that BT has been a losing bet for years. The stock has crashed 31.71% over one year and 54.35% over five. I regularly considered catching that falling knife, and was glad I resisted. Was it really ready to recover?
Also, the company has major long-standing problems, such as a hugely expensive pension scheme, and £20bn of debt. Plus it operates in a competitive market. UBS had warned BT may be forced to slash its dividend in half, to keep it affordable.
A value trap and a declining income stream? That worried me. So what I did what did every time, and decided to keep a watching brief. Then I blinked and the share price went gangbusters.
On 16 May, BT published its full-year 2023 results. I spotted a headline saying it had reported a 31% drop in annual profits, and expected another big sell-off. So imagine my surprise (and dismay) to see the shares jump 10% instead. It’s never easy trying to second-guess the market.
CEO Allison Kirkby put the kibosh on my dividend fears, hiking it 3.9%. It looks a lot more sustainable today, with normalised free cash flow set to double from £1.5bn this year to £3bn by 2030.
Dividend income security
Kirkby said BT had reached an “inflection point” as its full fibre broadband rollout programme hit peak capex. The group also hit its £3bn cost savings target a year early and was targeting another £3bn in gross annualised cost savings by 2029.
Who cares if pre-tax profits crashed from £1.73bn to £1.19bn? Or that group revenues rose just 1% to £20.8bn? The market didn’t. Not this time.
At time of writing, the BT share price stands at 126.5p. It’s up 20% since I decided against buying at 105.35p.
Frankly, I’d feel a bit of a chump diving into BT shares today. As if I’m following the herd. Inevitably, they’re not as cheap as they were, trading at 12.8 times forward earnings. That re-rating has partly happened. I prefer to buy undervalued shares before they recover, rather than afterwards. I remind myself that BT still has a heap of debt.
So I won’t buy the stock today. I’ll revert to my watching brief, and hope another opportunity pops up over the summer. And that I don’t miss it this time.
This post was originally published on Motley Fool
