BT (LSE: BT.A) shares look cheap as chips trading at just 6.4 times earnings. I love buying bargain-priced FTSE 100 stocks, especially when they come with a high yield, but investing in BT takes a strong stomach. It’s like riding the big dipper, but without the ups.
It’s incredible to think that its shares traded at 1,053p way back on 31 December 1999. Today, they’re at 125p. The slide feels inexorable with BT stock down 44.92% over five years and 23.81% over 12 months.
BT has just appointed its next CEO, former Telia boss Allison Kirkby, a non-executive director at BT since 2019. She’ll take over from retiring Philip Jansen in January 2024 at the latest. BT says Kirkby has “a history of having transformed businesses” and she’ll have to be at her best as the group desperately needs turning around.
This is a huge job
Revenues have declined for five straight years from £23.43bn in 2019 to £20.68bn in 2023, while pre-tax profits followed a similar trajectory. In 2019, BT banked £2.67bn. Last year, it was £1.73bn.
The dividend per share has halved from 15.4p to 7.7p in that time and was frozen at that level in 2023. Despite that, markets still forecast BT shares will yield 6.04% in 2024 and 6.07% in 2025. I’m not confident though. By then, its net debt will top £20bn. That’s a huge burden for a company with a market-cap of just £12.3bn.
BT also has £40bn of pension liabilities. Last year, the FT described it as a “small business supporting a huge pension scheme”. UBS recently warned that BT will have to borrow more than £900m a year to fund dividends. I can’t see how it can do that on top of existing liabilities.
Kirkby has a huge job on her hands and good luck to her. I’ll watch from a safe distance. Instead, I’ll build my position in a solid FTSE 100 dividend growth stock that’s also struggled lately but doesn’t face the same scale of problems, mining giant Rio Tinto (LSE: RIO).
This should bring ups with the downs
2023 was supposed to be a big year for commodity stocks, as China emerged from Covid lockdowns. Yet after a positive start, the world’s second largest economy grew just 0.8% in the second quarter.
This hit half-year profits at Rio Tinto, which fell 10% to £26.7bn, while EBITDA earnings crashed 25% to $11.7bn. Yet CEO Jakob Stausholm is still able to boast about Rio’s “robust financials”, something Kirkby can’t do.
The Rio Tinto share price has fallen 18.53% in the last six months, and is up just 5.92% over one year. It’s not quite as cheap as BT but 8.1 times earnings looks a good entry point to me.
Its dividend looks much more sustainable, forecast to yield 6.7% covered 1.7 times earnings, although these things are never guaranteed.
The outlook should brighten if the US gets a soft economic landing, as now looks more likely. However, we may have to wait until interest rates have started falling before Rio Tinto’s shares stage a meaningful recovery.
That’s OK though, I’m buying with a minimum 10-year view. Commodities are famously cyclical but that’s preferable to BT shares, which only seem to go down.
