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Talk of BT's dividend being under threat is wide of the mark, says Numis

Last updated: 13:43 07 Aug 2017 BST, First published: 09:43 07 Aug 2017 BST

Openreach
BT has agreed to legally separate from Openreach to address Ofcom's competition concerns

BT Group plc’s (LON:BT.A) underlying free cash flow is more substantial than some analysts think and talk of its dividend being under threat is wide of the mark, according to analysts at Numis.

The telecoms company has been forced to rein in its dividend growth following an Italian accounting scandal and as a result of the company’s long-standing pension deficit problem.

READ: BT should sustain cash flows and dividends after Openreach separation, says Barclays

At its full year results in May, the company delivered a 10% increase in the dividend but said next year’s rise would be smaller to reflect demands on its balance sheet, including a £300mln restructuring charge over the next two years with plans to cut 4,000 jobs.

An investigation of the Italian scandal, which found that BT failed to meet its accounting obligations under the Sarbanes-Oxley Act, triggered a £530mln write-down and £500mln hit to cash flow earlier this year.

BT tackling pension deficit

BT is also revaluing its £50bn pension scheme’s liabilities, with low interest rates expected to cause a sharp increase in its £7bn funding deficit. The company has already ended its pension agreement with unions in order to avoid larger top-up payments, which currently cost the company £500mln per year.

Some analysts estimate this will hurt underlying free cash flow and BT will spend net present value-negative capital expenditure for many years to come, Numis said.

But the broker said: “BT’s underlying free cash flow is much more substantial than some sell-side analysts assert, so we think talk of the dividend being under threat is wide of the mark”.

Numis reiterated a ‘buy’ rating and target price of 390p.

Ofcom likely to re-evaluate proposal to cut Openreach wholesale prices, says Numis

Separately, Numis highlighted Virgin Media’s opposition to Ofcom’s proposal to cut wholesale prices for entry-level fibre broadband offered by BT’s infrastructure arm Openreach to boost competition. 

Virgin Media believes Ofcom’s proposal will freeze spending by Openreach on all core and alternative ultrafast networks in Britain.  Virgin - one of the biggest investors in alternative ultrafast connectivity - also thinks its parent company, Liberty Global, may switch investment from the UK to elsewhere in Europe as a result of Ofcom’s recommendation.

“This adds to our confidence that Ofcom will row back materially from this proposal and in so doing boost BT’s equity value,” Numis said. 

Virgin and other major wholesale customers of Openreach have been pushing for new investment plans to include a wider deployment of full fibre optic connections to replace ageing copper telephone lines.

In March, BT agreed to legally separate from Openreach to address Ofcom's concerns about the network's dominance over the broadband infrastructure in the UK. 

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