Exane BNP Paribas thinks that shares in BT Group plc’s (LON:BT.A) remain “a conviction short for us given significant dividend risk” due to its pension issues, and it cut its target price for the telecoms provider.
In a note to clients, the French broker’s analysts said: “As BT grapples with deteriorating fundamentals and capex pressure (The Aggregation of Marginal Declines), we expect the ongoing triennial pension review and new Chairman will be the catalysts to trigger a dividend cut.”
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They added: “BT are struggling to balance the interests of all their stakeholders, and they will need the support of the unions, Trustees, government and employees as they endeavour to find more savings through further restructuring in the years to come. Without a more balanced capital allocation this support may not be forthcoming.”
The analysts said BT’s latest triennial pension valuation, priced as of 30 June 2017, will lock in low rates and higher inflation.
They now expect a pension deficit of £12.4bn, up from their previous estimate of £8.8bn estimate, and as a result cut their target price for BT by 20p, to 240p from 260p and repeat an ‘underperform’ rating on the stock.
BT shares edged up 0.91% to 304.80p each in late afternoon trading.
Market seems willing to give BT credit for measures they may take to reduce pension risk
The analysts said: “In our view the market is aware of the downside stemming from the size of the deficit and seems willing to give BT credit for measures they may take to reduce the pension risk, including closure to future accrual and asset backed contributions.“
They added: “The unions have expressed vehement opposition to scheme closure; bear in mind this would be the next in a long line of measures where employees and pensioners have been asked to take pain for the greater good (redundancies, pay freezes, RPI to CPI switch, non-pensionable pay rises), and we think it will be hard for BT to argue the pension is unaffordable given absolute dividend payments have grown fivefold in 8 years and the pay-out ratio is twice historic levels.”
The analysts also pointed out that this is before considering the populist argument that ‘BT is making footballers rich as they spend £700mln a year on sports rights’.
Meanwhile, on the other hand, the UK government is clearly fed up with ‘fibre austerity’, and BT now faces growing pressure to spend more as others embark on more Fibre-to-the-Premises (FTTP) investment.