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BT tops FTSE 100 in week of global market turmoil amid break-up speculation

AJ Bell's Russ Mould thinks a break-up of BT is unlikely but expects to see a new strategy for the business from the next chief executive who replaces Gavin Patterson
BT
BT has been trying to bring down its massive pension deficit, which stands at £3.9bn

BT Group plc (LON:BT.A) has topped the FTSE 100 this week amid speculation that it could be broken up.

Share price gains for the telecoms giant come despite a turbulent week in global financial markets, led by a slump in the value of US tech giants including Apple Inc (NASDAQ:AAPL) , Amazon.com Inc (NASDAQ:AMZN), Netflix Inc (NASDAQ:NFLX), Microsoft Corp (NASDAQ:MSFT) and Google's parent company Alphabet Inc (NASDAQ:GOOG)

US stocks suffered their worst fall in more than eight months and the FTSE 100 lost £26mln yesterday. Stocks have recovered today but the FTSE 100 is still down about 260 points since the start of the week at 7,050.

AJ Bell investment director Russ Mould pointed out that the market sell-off this week hasn’t dragged everything down in price with BT among the best performers.

“Looking at the data since 3 October, which marked the last time the FTSE 100 closed above the 7,500 level and last night’s market close, nine stocks actually increased in value,” he said.

“BT is at the top of the list amid chatter that it could be broken up. Gold miners Randgold Resources Ltd (LON:RRS) and Fresnillo PLC (LON:FRES) benefited from a resurgence in the gold price as investors flocked to supposedly safe-haven assets during the market sell-off.”

On rumours of a possible break-up of BT, Mould thinks such a move would be unlikely given that the company has made good progress in repairing its relationship with the regulator and that it is not under pressure from investors to restructure the business in such a way.

He also believes the company’s huge pension deficit would also present too much of a hurdle for a break-up.  As of June 30, the deficit stood at £3.9bn.

Next CEO has 'big job on their hands'

BT is currently yet to find a replacement for Gavin Patterson, who revealed in June he would be stepping down as chief executive towards the end of this year.

READ: BT Group reportedly in advanced talks to appoint outgoing Worldpay boss to replace Gavin Patterson

Mould said whoever takes the helm next has a "big job on their hands" due to the challenges BT is facing from mounting competition and a large pension deficit.

More positively, BT has successfully dealt with recent regulatory issues, having settled a dispute with the Ofcom over the structural separation of network division Openreach and surviving the government’s Wholesale Local Access review.

New controls on wholesale prices announced by Ofcom in February were not as bad as many had feared as the regulator wanted to encourage more investment in upgrades for the UK’s broadband network.

The Openreach division plans to replace the ageing copper lines with fibre optics to bring ultrafast broadband to three million homes and businesses by 2020.

BT shares remain at levels seen 22 years ago but dividend a big draw for investors

While BT’s shares have performed strongly this week, Mould noted that the price has not moved a great deal higher since levels seen in 1996. Nevertheless, investors still see value in the stock as BT continues to reward shareholders with a healthy dividend yield.

READ: BT dividend cut cannot be ruled out, says Morgan Stanley ahead of earnings  

Mould expects to see a fresh strategy from the next BT boss to grow the business but reckons the dividend is safe for now despite speculation that it could be at risk as the group prioritises investment in its fibre upgrade, continues to spend money on content for its TV offering and faces competitive pressures to cut prices for mobile packages.

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