Stock of the Week: BT

James Gard: Welcome to Morningstar. Another company making its stock of the week debut is BT. It has just put out a trading update for the nine months to the end of 2022. Whether this was a good trading period depends on how you view the numbers: revenue is roughly flat on the year, “adjusted” EBITDA is higher but pre-tax profit was down 15%. The company affirmed guidance for the full year. What has immediately grabbed analysts’ attention is a rise in debt to nearly £20 billion, and a drop in free cash flow.

High inflation is a double-edged sword for companies like BT – they can push through price increases for broadband, mobile phone contracts etc linked to CPI. BUT it increases the cost of servicing debt, especially with huge capital expenditure needed to upgrade infrastructure – for the rollout of full fibre and 5G. Staff need pay rises in a time of inflation too and the threat of industrial action seems to have been thwarted for now. All these factors mean demands on BT’s cash. We’ll know more when we get full-year results in May.

Shares nudged up after the update, building on a strong start to the year, along with other UK large caps. But shares have been in the doldrums over the past few years, reflecting a number of factors, including a dividend freeze during the pandemic. That now leaves them significantly undervalued, according to Morningstar analyst Javier Correonero. Income investors will note that the shares yield over 6% and an interim payout is due on February 6. For Morningstar, I’m James Gard.

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