At more than 750,000, telecoms giant BT Group PLC (LON:BT.A) has one of the longest share registers in London.
Punters poured in back in the eighties and nineties when the UK government sold off some of its shares, while hundreds of thousands of BT workers have also accrued small stakes in their employer.
READ: BT keeps dividend unchanged and ups fibre investment target
They will no doubt have been pleased, then, when new boss Philip Jansen erred on the side of caution in today’s results and kept the annual dividend in place at 15.4p.
The build-up to the results had been dominated by rumours that Jansen, who replaced Gavin Patterson back in January, might cut the divi, despite previous promises that it was safe for the next couple of years.
After all, BT faces a string of expensive investments to make in the coming years which will require some serious cash.
It needs to fund the continued roll-out of a superfast fibreoptic network while also forking out large sums to secure TV rights deals for its sports channel.
In total, BT has set aside almost £4bn of capex for the current year, similar to what it spent last time around.
Given those requirements, it wasn’t an unreasonable suggestion that a dividend yield of 7% was a luxury BT couldn’t afford.
Dividend cover looks fine
In reality though, BT can afford to keep paying out its dividend – at least for the time being.
Its dividend will once again cost it just over £1.5bn this year, while free cash flow is expected to come in at around £2bn.
Dividend cover – another measure of a how sustainable payouts are – is forecast at 1.8x in 2020. That’s ok, too: anything below 1.5x and the City starts to fret, while anything over 2.0x is seen as healthy.
While that should mean BT is fine to keep paying its dividend this year and probably next, the outlook further down the line is less certain.
Free cash flow – the money that flows into a company once all incomings and outgoings have been accounted for – has plunged in recent years.
In 2018, FCF came in at just shy of £3bn, but it fell by a fifth to £2.4bn in the year just gone. For 2020 – the current financial year – bosses have signalled for another 20% fall.
FCF will continue to come under pressure from higher capex costs and any further contributions to the pension scheme, which BT had to throw another £2bn at last year.
'Massive ramp-up' in investment
Former Worldpay boss Jansen has already promised a “massive ramp-up” in investment after raising the target for the number of homes to have fibre-to-the-premises (FTTP) broadband by the mid-2020s from 10mln to 15mln.
Falling profits will also pressure FCF from the other side: adjusted underlying earnings (EBITDA) fell 2% in 2019 to £7.4bn, and that figure is set to drop again to between £7.2-7.3bn this year.
Do the maths. There is only so long that kind of erosion can go on for before the business isn’t bringing in enough cash to pay the dividend.
“The margin for error is getting smaller,” warned AJ Bell investment director Russ Mould, “and if profits do come under severe pressure then the pay-out could come under threat.”