BT Group PLC's (LSE:BT.A) first-half results went down like a lead balloon this Thursday, with shares tumbling as much as 7% to wipe nearly a billion pounds of value off the company.
A 1-2% cut to full-year revenue guidance, which BT blamed on non-UK operations and a “competitive retail environment”, did most of the damage, as did chief executive Allison Kirkby’s post-Budget warnings.
Sharp increases in National Insurance Contributions (NICs) announced by Labour Chancellor Rachel Reeves in her debut Budget is “just a new inflationary pressure we need to suffer”, Kirkby told shareholders.
“We always get surprises like this and we always manage to offset them,” she added.
To offset tax increases, BT said it will pursue higher pricing (this could be difficult in the face of regulatory restrictions) and further cost-cutting measures (starting with 2,000 job cuts in the reporting period).
Despite these underwhelming results, anxious income investors can rest easy - BT increased its interim dividend to 2.4p per share from 2.31p per share last year.
Combined with an ongoing pension deficit, these payments caused BT’s net debt to increase to a record £20.3 billion from £19.3 billion in March.
Excluding lease liabilities, net financial debt was around £15.5 billion at the end of the period.
It is worth noting that finance interest payments appear to be manageable. At £449 million in the first half, they are down slightly from last year’s £451 million.
But a debt obligation of that size remains an overhang nonetheless.
One of the biggest challenges for Kirkby going forward will be how to pay down this debt.
Despite being profitable, she is reportedly exploring options to carve out BT’s global business, which comprises enterprise-level communications services in the public and private sectors.
Barring a sum-on-the-parts valuation, it is unclear how much cash this would generate.
Will Kirkby instead turn her attention towards that generous dividend? If she is, she’s keeping her cards close to her chest, instead offering promises of cost efficiencies and more lucrative pricing strategies (for now).
In afternoon trading, the stock was down 5.4% at 134.49p.