I think you would be hard pressed to find a more hated stock in the UK than BT (LSE: BT.A) right now. The company is under fire from all directions.
Regulators are fed up with the group’s inefficient monopoly on telecommunications equipment throughout the UK. Investors are fed up with the lack of capital gains from the BT share price. Employees are fed up with management. Customers are fed up with the company’s high prices and poor service.
Against this backdrop, it’s no wonder the shares have recently plunged to a seven-year low. The question I’m planning to answer today is, how much lower can the BT share price go?
Sliding lower
In theory, the lowest any company’s share price can go is zero. However, and the case of BT, I think it’s very unlikely that the company will end up in this situation. After all, the group is the UK’s largest telecommunications enterprise.
But unless the company sorts out its most pressing issues, I reckon the stock price could fall even further.
For a start, BT has a terrible reputation with customers. On leading customer service review sites Trustpilot and broadband.co.uk, BT has an average rating of just 0.6/10 and 2.8/5 across 30,000 customer reviews. The main complaints seem to be that it offers poor value for money and terrible broadband connection speeds, a result of underinvestment.
Unfortunately, it doesn’t look as if the company is making an effort to remedy these issues. Later this month, the second price hike on BT services this year will come into effect, the fifth price increase in four years.
It seems to me that competitors have been quick to capitalise on this mistake. I’ve seen and heard a number of adverts from other providers highlighting BT’s price hikes and inviting customers to switch in the 30-day grace period the firm is obliged to give.
Cash crunch
BT needs to increase prices because it needs more money to fulfil all of its obligations to stakeholders.
As I noted back in June, BT is having to carefully balance its finances. For the financial year ending March 31, it generated £5bn in cash from operations. Capital spending during the year absorbed £3.4bn, and the dividend cost £1.6bn. As management has stated its commitment to the company’s dividend, it looks as if this cost is here to stay. But the firm also has to support its mountain of net debt, which is just under £10bn, as well as close to £1bn a year in pension deficit payments (on top of a lump sum). Finally, the group has been pressured to devote £3.7bn upgrading its mobile and fibre networks over the next few years.
With all these demands on the firm’s cash flows, I reckon it’s only a matter of time before BT is forced to cut its dividend (despite management’s current intentions). With competitors snapping up its customers, price increases won’t stave off disaster forever and regulators are unlikely to let the firm cut investment to support shareholder returns.
As the company’s 7% dividend yield is currently supporting the share price, any dividend cut could result in a dramatic drop. With this being the case, I reckon the BT share price decline is not over yet.
