BT fails to impress with dividend as profits declines persist

Sales and profits both declined at BT Group in the first half, as expected, but after amid persistent challenges in some parts of the business the telecoms giant defied some doubting Thomases by maintaining its interim dividend.

Revenues for the first half were flat at £11.79bn after dropping 1% in the second quarter to £5.95bn, while adjusted earnings before interest, tax, depreciation and amortisation were down 3% at £3.60bn due to a 4% fall to £1.8bn in the latest quarter.

A key measure of the group’s revenue trend, underlying revenue excluding transit, was down 1.5%.

The performance, which was bang in line with the consensus forecast from City analysts, came as more encouraging results in the consumer facing business, notably the acquired EE mobile arm, helped offset ongoing challenges in business divisions, in particular Global Services.

Global Services revenues declined 10% due to ongoing challenging market conditions and also lower IP exchange volumes and equipment sales in line with management's plan to reduce low-margin business.

The 4% fall in underlying operating profits reflected investment in sports rights and customer experience, along with higher pension costs, business rates and decline in Global Services partly offset by cost savings.

TV customer numbers grew by just 7,000 during the quarter, despite the high burden of sports rights spending, down sharply from the 11,000 TV customers during the fourth quarter of the last financial year.

As for BT's pension, which remains a source of angst for investors, the company said it the review of future pension benefits was continuing and it expects to begin a 60-day consultation with affected employees on proposed changes "shortly".

Chief executive Gavin Patterson, whose bonus was cut this year due to disappointing profits, said the outlook for the full year was being maintained, having previously guided to "broadly flat" revenues, adjusted EBITDA of £7.5-7.6bn and a "progressive" dividend.

From next year, the progressive policy will remain, but the interim dividend will be fixed at 30% of the prior year’s full year payment.

He said the integration of EE and the consumer business and other restructuring programmes were on track to deliver run-rate savings of £250m and £150m respectively by the end of this year.

"We are working closely with the UK government, Ofcom and our communications provider partners to find the right solutions to accelerate the deployment of fibre and our universal broadband commitment. We are committed to delivering ultrafast speeds to 12m premises by the end of 2020."

BT SHARES RESUME FALL

BT shares rose initially before tumbling as Thursday morning wore on, hitting 253.45p just before 1000 GMT, a 2.6% fall on the day.

Analyst Mike van Dulken at Accendo Markets said the initially positive share price response quickly gave way to the downtrend that has dragged the shares 50% from February 2016's highs around 500p.

"Investors clearly require more than a 6% yield. Will good news be forthcoming to help the shares up 4% to challenge accelerated Oct falling highs at 267.8p? Or is the next stop 9% lower at 233p, resistance-turned-support from December 2012, and the current down channel’s floor?"

Looking at the reasons for the fall, Helal Miah at the Share Centre said while the overall numbers were more or less in-line with expectations, there was not too much inspiration for the market in today’s figures.

"Investors have questioned the material slowdown in TV subscription rates compared to the same period last year at a time when they are spending big on sports rights," he said, noting free cash flows for the first half have fallen by 23%, while reported profits have fallen by a similar amount.

"Interestingly however, the shares rose in early trading partly in reaction to the management maintaining their full year guidance and keeping a progressive dividend policy. There has also been progress on a number of restructuring programmes to turn the business around and deliver cost savings."

As well as the increasing cost of sports rights, George Salmon at Hargreaves Lansdown noted that BT is facing a bigger bill to maintain and expand its physical assets.

"This may go some way to explaining why BT wants clarification on how the costs of the nationwide roll-out of superfast broadband can be recovered. The parts of the group behind the consumer-facing curtain are on the whole disappointing too.

"With the group still reeling from the Italian accounting scandal and several other fines and charges, a rather non-committal ‘progressive’ dividend policy is fair enough for now. However, we can’t help but feel that if dividend increases are to be genuinely impressive, rather than just ‘progressive’, BT will need to get its house in order sooner rather than later."

Numis analyst John Karidis noted that free cash flow guidance remains unchanged at £2.7-2.9bn, which suggested the £2.7bn consensus estimate may edge up 3-5%.

He sees 50% upside to the shares, based on 2018 estimates of 27.9p earnings per share, which is within the consensus range, and implies BT trades on a 9.3 p/e ratio versus peers at 16.2, with a 6.1% dividend yield versus peers' 4.1%.