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BT: the perfect time to pile in?
When investors talk about the 'Lost Decade', they're usually referring to Japan's grim economic and stock market performance through the 1990s and beyond.
But if you've been invested in BT (LSE:BT/A) for the last 25 years, you'll know all about lost decades rather closer to home. Because if you're still holding shares you bought when the company was privatised in 1984, by now you'd have lost a third of your original stake. So much for 'buy and hold'.
Then yesterday the company delivered yet another blow to its long-suffering shareholders. It slashed the final dividend by nearly 90%.
So you could be forgiven for selling out now. But if you don't mind a bit of risk (and if you do, you shouldn't be buying shares anyway), then this might actually be the perfect time to pile in...
BT's not been the same since 1999...
"BT was Margaret Thatcher's first flotation - and her boldest", said Elizabeth Judge in The Times. "It came to represent the high-water mark of Thatcher's Britain: a loud statement of the Tory PM's belief in the power and vitality of the free market".
25 years ago, 130p a shot for the shares seemed a great deal. And it was. The madness of the tech bubble saw the share price soar to more than £10 at the end of 1999. But then the bubble popped – and BT's never been the same since.
BT shares are now languishing at just 90p each. They've undershot the overall market by more than 70% since 1989. What's more, shareholders no longer even have the solace of a decent dividend, as last year's final payout has just received a near-90% haircut (making the overall full-year payout nearly 60% lower than last year).
...but it's still a buy
It's enough to make anyone hang up on the stock. But if you've stuck with BT through thick and thin, is it worth holding on? Or even buying more?
First signs don't look too good. Apart from that dividend chop, the company ran up a £1.3bn pre-tax loss in its final March quarter. That resulted in a full-year loss of £134m, against a near-£2bn profit for the 12 months before. And the group also sees sales falling between 4% and 5% this year. Not great for investors' shattered nerves.
But maybe BT's headache isn't quite as bad as it seems. Three of its four divisions have done OK. The latest damage was done, once again, by its troublesome Global Services IT Division, which provides communication networks for multinationals. "Basically it boils down to Global Services' overbid and underestimate of the cost of two big contracts, one of which we assume is the disastrous £12.7bn NHS programme to provide every patient in England with an electronic health record", says FT Alphaville's Neil Hume.
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That meant the company had to write down the value of the contracts by £1.3bn. That's what resulted in the big loss, but at least it's now on record. And management seems to have got the message on what needs doing next. Costs are being cut hard – another 15,000 jobs, many more than expected, are going in the next 12 months – with the aim of saving well over £1bn this year.
Another dark shadow is the pension fund, which has swung from a £2bn surplus last March to a net £3bn deficit this time round. But despite the slump in stock markets, this concern could soon ease. The swing factor for pension funds is the yield on gilts (UK government debt). If gilt yields drop, pension funds must find more money to meet their future liabilities, because they can't rely on investment returns to grow fast enough to meet the cost of funding all those future pensioners.
But the more our spendaholic government splashes out, the more it will have to borrow. And over time, that'll force gilt yields back up again, and pension fund deficits – including BT's - down once more.
There's no question that BT's turnaround will be a tough task for boss Ian Livingston and his team. But as Michael Kovacocy at Daiwa says, "once they get sorted there's no reason they can't grow". When the recession eases, "the first thing that's going to snap back is business spend" – clearly good for BT. "Even with the expected reduction in revenue growth, there is a profitable business lurking inside", says the Telegraph's Damien Reece. "If Livingston grasps his opportunity, BT can emerge revitalised".
The bottom line: it's a brave investor who buys into BT now. It's still got too much debt (over £10bn), and needs that cash flow to start paying it off. But getting on board soon after a huge payout cut can often pay off – you move in just as disillusioned holders are bailing out. And the yield is still a very attractive 7%, even after the cut. So investing now is brave, yes. But potentially very profitable.
An American alternative for the fainter-hearted
However, if BT's a bit too rich for your blood, but you still like telecoms stocks, last week's MoneyWeek magazine highlighted an American alternative: Cash in on America's telecoms monopoly.
Porter Stransberry of Daily Wealth reckons Verizon (NYSE: VZ) is the best US telecoms bet, with a "$40bn fibre network that will dominate the flow of data in the US for at least the next 50 years". This week the firm sold its traditional phone operation for $5.25bn to focus on its faster-growing businesses. On a current year p/e of below 12 times and a yield of more than 6%, Verizon fits the bill if you prefer a, perhaps, smoother ride than BT (though don't forget the currency risk of buying a dollar asset).
Just before I go, you may have seen our editor-in-chief Merryn Somerset Webb talking house prices on the BBC's Property Watch series all this week. If you missed any of it, you can see what Merryn had to say and catch up with all four programmes on the BBC's iPlayer page: Property Watch.
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