BT Group PLC (LON:BT.A) will not cut its dividend despite concerns that the telecoms giant cannot afford to keep doing so amid rising costs and struggles in its enterprise businesses, Numis said on Monday.
Numis left its rating on BT at ‘buy’ and raised its target price to 400p from 390p, saying: “We remain confident DPS (dividend per share) will not be cut because of our own FCF (free cash flow) analysis and because management has said so repeatedly.
READ: BT: London arm of Deutsche Bank pulls few punches with 'sell' recommendation
“We expect BT will substantiate this point again in investor meetings which start today, and on Wednesday when the CFO will host a Q&A session for sell-side analysts.”
The note comes on the back of BT’s second quarter results last Thursday when the company left its interim dividend at 4.85p per share, disappointing investors who had expected a bigger payout.
BT also said its progressive dividend policy remains unchanged as it reported a 4% decrease in adjusted underlying earnings (EBITDA) of £1.8bn, dragged lower by rising costs of securing sports rights and investing in customer services.
READ: BT shares slip back as sports rights costs drag on second quarter profits
A weak performance in its enterprise businesses, including Global Services, also weighed on earnings. Global Services revenue fell 10%.
Global Services not key to investment case, says Numis
Numis said Global Services accounted for 20% of BT’s sales in 2017 but less than 3% of EBITDA, minus capital expenditure, so the revenue decline is “not key to BT’s investment case now”.
The broker noted that BT remains on track for £300mln of savings from the integration of EE and the merger will provide a boost to its mobile business.
On BT’s investment in premium content, Numis said: “The aim remains to be a good No.2 player only. Content helps BT (i) better acquire/retain fixed line and EE customers; (ii) grow ARPU (average revenue per user) from residential fixed line and EE customers; (iii) earn ARPU from residential fixed line customers served by rivals; (iv) grow ARPU from commercial establishments (pubs, hotels, etc.); (v) earn wholesale revenue from Virgin Media; (vi) earn revenue from TV advertising.”
BT needs Ofcom to scrap proposed wholesale price cuts
BT also plans to invest in broadband network upgrades to deliver ultrafast speeds to 12 million premises by the end of 2020. The company has said the network upgrade will likely cost between £3bn and £6bn and would need to be able to claw back the costs from customers.
However, regulator Ofcom has proposed cutting the wholesale prices that BT’s network subsidiary Openreach charges telecoms operators.
“All stakeholders now accept that large scale FTTP deployment also requires end-customers to pay more per month and to be force-migrated from copper to FTTP lines,” Numis said.
“Altnets cannot match Openreach’s rollout pace, and they need Openreach prices not to be cut because these also drive altnet investment returns.”