BT shares slump as cash flow withers

• Telco finds itself fighting on many fronts with only finite resources
• Regulatory pressure is unabated
• Cost cutting plan designed to help support earnings and cash flow

“In darts, players know that trebles are for show and doubles are for dough and the equivalent in investment is that adjusted profits are for show, but cash flow is the ultimate measure of dough and in BT’s case, the telco is not generating as much of it as shareholders would like,” says AJ Bell investment director Russ Mould. “On an adjusted basis, BT showed improved profits in the year to March 2023, and it has targeted further improvement in the coming twelve months. However, investors will be concerned to see that cash flow continues to shrink and debt continues to rise.

“BT is fighting on several fronts, in the mobile, fixed-line and broadband arenas and even if the merger of BT Sport with Eurosport to create the TNT Sport joint-venture provides it with extra ammunition, it can be argued that the firm’s resources are spread pretty thin. Add ongoing regulatory scrutiny, a debt pile and a pension liability to fierce competition and BT looks boxed in. This may be why the shares trade no higher now than they did in early 1985, shortly after its privatisation by Margaret Thatcher’s Conservative government. Even if it found a way to generate serious increases in profits and cash flow, you would have to wonder whether those improvements would be regulated away in the face of political and public outcry.

Source: Refinitiv data

“As it is, BT is competing in multiple arenas at once, all while helping the UK government to meet its targets for rolling out broadband across the nation. The need to invest across so many fronts, as well as pay interest on its debt, meet lease payments and top up the pension fund means BT only has so much cash in the pot with which to buttress and defend its competitive position. The tax break on Openreach’s fibre-to-the-premises is helpful here but cash flow is no higher now than when Philip Jansen took the helm from Gavin Patterson in 2019.

Source: Company accounts

“The picture does not look much brighter if you apply the old rule of three and look at how growth in sales, operating profit and cash flow compares, on the grounds that they should broadly track each other over time.

Source: Company accounts

“Thankfully the pension deficit is way down, thanks to BT’s own top-ups and the relief provided by higher bond yields in the wake of Bank of England interest rate increases, but a deficit of £3.1 billion, lease commitments of £4.6 billion and £14.6 billion in net debt represent more than double BT’s market capitalisation – and thus effectively double the purchase price should any raider or predator contemplate a bid, as any buyer would inherit these liabilities as well as any assets.

“The 7.7p-a-share dividend may offer income seekers some solace but that does not look likely to grow much, if at all, even if it is just half the level that preceded the cut pushed through in 2019.

Source: Company accounts

“All of this helps to explain why BT is looking to push through more job and cost cuts, even as management targets revenue growth and an increase in its preferred profit metric of adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) for the coming year.

Source: Company accounts

“Management may be watching the Vodafone-Three talks with interest, to see if it changes the competitive dynamic of the UK mobile market, at least. Vodafone continues to drop hints it is looking for more ‘rational’ markets but politically and publicly popular more rational pricing – and presumably higher prices – remains open to question, especially in the current economic environment of sticky inflation.”