Does BT Group plc’s 6% dividend yield suggest it is undervalued?

Could BT Group plc (LON:BT.A) (BT.A.L) offer impressive income investing potential?


Even though the BT Group plc (LON:BT.A) (BT.A.L) share price has risen by around 25% in the last six months, it still has a dividend yield of around 6%. This makes it a relatively high-yielding share in the FTSE 100, with the wider index having a yield of almost 4.5% at the moment.

However, I’m still cautious about the prospects for the telecoms company from an income perspective. Its dividend may be affordable at the moment, with it expected to be covered 1.7x by profit in the current year. However, I believe that its dividend growth prospects could be limited compared to some of its index peers.

There are a couple of reasons for this. BT is set to welcome a new CEO in the New Year. Although I have not seen any commentary to suggest that the new CEO will cut the dividend, it would not surprise me if that decision is made. The business is seeking to implement a turnaround strategy, and it may be a good idea in my opinion to redirect some capital towards growth areas, rather than paying it to investors as a dividend.

Another reason for an uncertain outlook when it comes to the company’s dividend growth outlook could be its EPS forecasts. BT is expected to report a fall in EPS in the current year and also next year. This would make it five years in a row of falling EPS, which does not suggest to me that strong dividend growth is likely in the medium term.

That said, I remain optimistic about the long-term prospects for the business. I feel that it now has a sound strategy and may be able to deliver improving financial performance in the long run. While volatility and uncertainty could be high in the near term, it may be able to offer improving total returns in future years.

About Robert Stephens 5430 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email or use one of the other contact methods available on the 'Contact Us' page