BT Group plc (LON:BT.A) is well placed to pay a growing dividend over coming years as an improvement in its operational performance and continued cost-cutting measures support free cash flows, Barclays Capital said in a note today.
Barclays repeated an ‘overweight’ rating and target price of 450p as it assessed BT’s Openreach subsidiary, costs related to compensation to rivals for delays in connecting high-speed business lines and its pension deficit.
READ: More bad news for BT and Openreach as data shows UK broadband speed lags most of Europe
Openreach, which develops and maintains the telecoms network in the UK and is used by other telephone and broadband providers, made a 10.4% return on capital in its charge-controlled services, in fiscal year 2017, compared to 13.1% the previous year.
“We are encouraged to see that BT’s return on capital for charge controlled services is now just 10.4% (was 13.1% in FY16), with a further 120 basis point drag likely in FY18 (which we already model) – which takes returns close to the expected cost of capital of ca9-10%,” Barclays said.
Deemed consent compensation 'too conservative', says Barclays
Barclays also believes the £300mln BT has set aside to compensate rivals for broadband installation failings in its Openreach network division between 2013 and 2014 may be "too conservative".
The bank expects the total costs for redress could be nearer to £150mln, given that Virgin Media – which makes up 25% of total market share – appeared to have settled for £22mln while BT indicated it had paid £27mln in the last quarter.
In March, regulator Ofom imposed its largest ever fine of £42mln for abusing the “deemed consent” system that assumes customers agree to an extension if BT takes longer than the contracted time to deliver services.
Barclays expects a decline in BT's pension costs
On the group’s pension deficit, Barclays noted media reports that BT is considering closing its defined benefit scheme for existing members.
“This would likely not change the total size of deficit but would likely reduce annual service costs and cap liabilities,” it said.
“The pension position is also likely to have materially improved by the next review, enabling BT to increase dividends and deleveraging.”
Barclays expects long-term revenue growth of about 1%, with its consumer division rising 1-2% and the business segment “shrinking slightly”.
For fiscal year 2018, it sees revenue broadly unchanged at £24bn and underlying earnings (EBITDA) falling to £7.5bn from £7.6mln in 2017, reflecting higher cash outflows due to an increase in specific items.