Analysts at Morgan Stanley think that “dividend sustainability appears the main risk” currently for BT Group PLC (LON:BT.A), with the US bank concluding that conditions today are similar to those around when the telecoms giant last cut the payout in 2009.
In a note to clients, they noted that in 2009 management changes, a profit warning in Global Services, and rising pension payments saw BT chop the year-on-year payout by over 60%.
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The analysts said: “The situation in 2017 looks similar with (1) a new Chairman and CFO appointed; (2) a profit warning following accounting fraud in Italy; (3) an upcoming triennial pension review where we forecast the deficit has ballooned to £13bn from £7bn previously.”
“In addition, BT faces an additional cash call from fibre investments, which we believe cannot be absorbed into the existing capex budget, as was the case for their VDSL (fibre to the cabinet) upgrade plan in 2009,” they added.
The analysts said they think there is around a 30% downside risk to the dividend, with BT’s management in May having dropped its commitment of "at least 10% growth" in the payout to "progressive" growth.
But, they added that this “may not be far enough”, with BT's payout having been creeping up from 28% of normalised free cash flow in 2009 to 55% of free cashflow today.
A 30% dividend reduction implied
The analysts said a reset of the dividend back to a 40% payout could be possible, which would imply a 30% reduction, taking the full year 2018 estimated dividend to around 11p, giving a 4% dividend yield.
They have reduced their price target for the stock to 320p from 350p, reflecting downgrades to their forecasts for BT’s Business and Public Sector unit.
But the analysts retain an ‘equal-weight’ rating on BT shares which are down 23% in the year-to-date and “appear to be in a holding pattern”.
In mid-morning trading, the FTSE 100-listed shares were changing hands at 280.95p each, up 0.6% or 1.6p on last night’s close.