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BT's extra 5G costs raises further dividend questions

“In order to make 5G work we are going to have to use other manufacturers’ equipment,” says chief executive Philip Jansen

BT Group PLC -
Is CEO Philip Jansen listening?

BT Group PLC (LON:BT.A) has answered questions about why the government’s decision over Huawei’s mobile equipment will cost company so much over the coming five years, but for many investors the bigger big question mark hangs over its future dividend.

On Thursday morning, the telecoms giant said it expected a £0.5bn hit from Boris Johnson’s decision to allow Huawei equipment to be used in the UK telecoms network, despite pressure from his defence secretary and security services on both sides of the Atlantic.

READ: BT Group warns government's Huawei 5G decision will have £500mln impact

However, the key point for BT, explained chief executive Philip Jansen, is that the former state telecoms operator has relied heavily on Huawei equipment to run its current 4G mobile network.

It is estimated that two thirds of BT’s existing network used equipment from the Chinese tech group.

And the government’s decision is structured to limited the amount of Huawei 5G equipment can be used in the UK telecoms network at a maximum 35% market share of the UK network by 2023.

“The way it works at the moment is when you put a 5G box on a mast it has to be on top of a 4G box from the same supplier,” Jansen told reporters.

As more than 35% of BT’s 4G boxes are Huawei, he said the company is going to “have to take out some Huawei 4G boxes and not use them again”.

“That is probably the single biggest cost. In order to make 5G work we are going to have to use other manufacturers’ equipment.”

This extra £0.5bn will clearly put pressure on BT’s free cash flow, which already dropped 42% to £1bn in the past quarter, with net debt mushrooming from £11.1bn to £18.2bn.

To cut or not to cut?

As a result, the BT dividend, already a subject of much debate after Jansen’s chairman Jan du Plessis said the board would consider reducing the dividend in “a year or two in the future”, comes under more security.

Analysts at Deutsche Bank said the question over how BT will fund its dividend alongside paying for the continued rollout of the fibre network “remains unsolved”.

Doubts about the once attractive dividend are causing investors to ring off, with the shares down more than 60% over the last four years and another 7% on Thursday to 162.39p.

Neil Wilson, analyst at Markets.com, said the uncertainty over the dividend was a “huge” factor.

He adds that Jansen was also paying “too much” for football broadcast rights and “should have done a kitchen sink job” and cut the dividend when he started early last year.

“The cost of investment in 5G and fibre is crippling, despite the cutbacks and cost savings. Net debt has ballooned to more than £18.2bn – up £7.2bn from March 31st 2019.

“How can BT justify paying over £1bn in divis when it needs to sort this debt out, get a grip on the pension deficit and do the kind of capex needed for 5G and mass fibre rollout?”

That is the question.

Quick facts: BT Group PLC

Price: 135.68 GBX

LSE:BT.A
Market: LSE
Market Cap: £13.41 billion
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