BT is making progress and the dividend is back – but is it time to buy yet?

Over the past 15 years, the BT (LSE: BT.A) share price has produced a pitiful total return of just 0.3% a year. That’s a real loss after taking inflation into account.

The former telecoms monopoly has struggled to grow in an increasingly competitive market – the UK telecoms market is one of the most competitive in the world and companies like BT cannot afford to take their market share for granted.

Competitors have taken advantage of BT’s lack of strategy. Under the helm of its former CEO Gavin Patterson, BT tried to become a multimedia giant, branching out into pay-tv and mobile. This was a huge error: BT ended up spending billions on building out its pay TV business and fighting over football broadcast rights with Sky.

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But while these two titans of the media world were slugging it out over content rights, smaller rivals were nipping at BT’s position in the broadband and phone markets. Management’s decision to focus on growth at any cost and not on defending BT’s market share was a huge mistake.

As the group has struggled to catch up, the BT share price has taken a hammering. That’s not really surprising – net profit has crumbled from £2.5bn in 2016 to £1.3bn for the fiscal year to the end of March.

BT’s long road to recovery

The good news is that there are signs that BT is starting to turn things around. BT’s new management has woken up to the fact that it can’t compete in the highly competitive pay TV market. It has agreed a sports joint venture deal with Warner Bros Discovery (Nasdaq: WBD) and has drawn a line under its fight for customers with Sky. The two parties have agreed to share their resources under a long-term supply deal.

As it backs away from its media ambitions, BT is also investing heavily in its telecoms network, something it should have been doing for the past decade. While BT has skimped on spending, competitors, such as the private-equity-backed City Fibre, have ploughed money into expanding their fibre broadband networks, gaining an edge on BT and building a better reputation.

Still, BT remains the UK’s largest broadband provider, so it does have a chance to get back into the game. The company has ramped up spending on infrastructure as part of its goal to extend its fibre broadband network to 25 million premises by the middle of the decade.

Capital spending for the fiscal year to the end of March was up 25% to £5.3bn. Excluding spending on mobile spectrum (a better indicator of spending on infrastructure assets), spending jumped 14%.

To fund this, BT has had to make some tough decisions. Management cut the dividend in 2020, and soon after announced plans to slash costs. It is targeting annualised cost savings of £2.5bn by 2025. These decisions are already helping the business. While revenues fell 2% overall last year, reported profit before tax ticked higher by 9%, thanks to lower costs.

Rising profits have given management the confidence to restore the full-year dividend at 7.7p per share. That’s around half of the level before the cut in 2020, but it’s a start, and leaves the stock yielding 4.4% at current prices.

Profits are growing, but there are still challenges to overcome

BT’s new management seems to be pushing the company in the right direction. However, I just cannot get comfortable with the idea of investing in the business.

BT is a huge, lumbering beast. It is a vital part of the UK economy, and as a result, regularly attracts the ire of politicians and regulators. The operating structure is also complicated. Openreach, which is responsible for maintaining the UK’s telecommunications network, is part of BT, but it is also a legally separate entity. In 2017, communications regulator Ofcom demanded the legal separation of the two businesses to make the market more competitive.

Another reason Openreach remains a subsidiary of BT is because separating the two companies' pension funds proved too challenging. That also makes me wary of BT’s recovery story – the group’s pension fund is underfunded to the tune of £1.1bn (as of 31 March 2021) and filling this gap is placing yet another demand on cash flow.

Throw in the fact that investors have to consider BT’s debt. Net debt rose to £18bn in the year to the end of March and maintaining this is costing the business a third of its operating profit every year. These charges will only increase as interest rates rise.

All in all, I think BT is moving in the right direction, but it still has a lot of issues to deal with. While the resumption of the dividend is a step in the right direction, I’m in no rush to buy the stock as it’s difficult to determine how growth will pan out over the next five to ten years. What’s more, a valuation of around nine times 2023 earnings seems about right for a company struggling to expand in a competitive market.