With the BT Group plc (LON:BT.A) (BT.A.L) share price currently having a dividend yield of around 7%, some investors may be attracted to it. After all, its income return is more than twice the rate of inflation and it is difficult to find many shares which offer a higher dividend yield in the FTSE 100 at the moment.
However, what may concern some investors is the sustainability of the company’s dividend. It is forecast to post a rise in EPS of between 1% and 3% over the next couple of years. These are relatively low numbers and suggest that the company lacks a clear growth catalyst.
Further, BT is making major changes to its business model at the moment. For instance, it is seeking to cut costs as it looks to become more efficient in what is an increasingly competitive quad play industry.
Additionally, it continues to invest heavily in areas such as pay-tv, where it is seeking to build customer loyalty. While this strategy may be working, it is putting the company’s finances under relatively high pressure.
Therefore, it is understandable that there may be concerns about the future growth prospects for the BT dividend. But in my view, the company may be able to offer a sustainable income return which remains in excess of inflation.
I feel that the stock’s strategy could lead to a stronger and more efficient business over the medium term. In particular, its cost cuts could provide a tailwind for its profitability and make it easier for the company to pay a higher dividend.
There are also strong growth prospects within the quad play industry in my view. Although a number of TMT companies are broadening their product offerings, BT seems to have a dominant position as well as a high degree of customer loyalty. It may therefore be able to afford a higher dividend once the changes it is making to its business model begin to impact on its financial performance.
That’s why I think the company has income investing appeal for the long run. While potentially volatile, it could deliver a high income return.