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BT dividend cut an "obvious" option as telcos "not immune" from coronavirus

Analysts at Barclays said BT's uncovered dividend “remains the elephant in the room” and cut its forecast payout

BT Group PLC -
Concerned about BT's dividend are rife as it has to fund the UK's broadband rollout

BT Group PLC (LON:BT.A) and other telecoms companies should be resilient to direct impact from the coronavirus pandemic and likely macroeconomic downturn but are “not immune”, analysts have said, including their dividends.

Last year, despite growing expectations that it would be one of the many high-yielding companies to take a prudent slice off its annual payout, BT maintained its dividend at 15.4p per share, costing it a total of £1.07bn. 

While strong cash flow generation means there is “no obvious need” to slash dividends, analysts at Barclays said on Monday that BT was an obvious candidate to pare its payout as the incumbent UK telecoms group faced rising capital spending requirements as it rolls fibre broadband around the country, meaning the Covid-19 epidemic was “presenting clear opportunities to cut”.

Over at UBS, BT and TalkTalk were upgraded to ‘neutral’ from ‘sell’ among the changes revealed in a note to clients on Monday, with analysts saying they “remain fundamentally cautious” but the companies were now “close to fair value” post the recent sector-wide share price correction.

The UBS analysts said they expect the sector to be “relatively resilient” in the short-term, helped by lower commercial costs and also lower capital expenditure. 

However, UBS and Barclays, which also issued a note on Monday, both used the same words to warn investors the sector is “not immune from a downturn”.

Both sets of analysts said the longer the current restrictions continue, the greater the risk to business clients, which represent around a quarter of sector revenues. 

In the last downturn, sector B2B revenues declined around 10%.

READ: Dividend dump hits £1.5bn as UK PLC conserves cash for coronavirus battle

In light of many companies abandoning 2020 outlooks and cancelling dividends amid the coronavirus crisis, Barclays trimmed its forecast for the sector as it expects most telecoms companies to revise current year guidance downwards to reflect an “immediate impact” of the virus on roaming, customer churn, subsidies, business customers and weaker macro, with up to 8-9 percentage-point shifts in domestic GDP assumptions. 

“That said, we would expect telcos to stress the strong recurring revenue streams, solid free cash flow generation, and low balance sheet/refinancing risks.” 

On the back of lower earnings forecasts, Barclays cut its share price target for BT to 130p from 150p, with analysts estimating the dividend will be cut. 

BT, which a material exposure to business customers compared to peers and so is likely to be impacted by lower mobile roaming traffic/SME revenues in the near term, is expected to face a major slowdown from corporate clients in the next financial year. 

“BT’s uncovered dividend remains the elephant in the room – given rising competitive pressures, rising capex, likely elevated pension contributions from 2021, material COVID-19 and macro uncertainty,” Barclays said, seeing a rebasing as “increasingly likely” and forecasting a cut to 5p from 7.7p per share.

Barclays also cut its share price targets for TalkTalk to 130p from 150p and for Vodafone to 170p from 190p, though both were kept on ‘overweight’ ratings.

UBS cut its price target for BT to 120p from 140p and for TalkTalk to 87p from 101p.

BT shares spiked 4% in early trading but had slumped 2% to 117.3p by mid-morning, while TalkTalk was down 1.5% at 83.5p and Vodafone was down 3% at 113.5p.

Quick facts: BT Group PLC


Price: 160.3 GBX

Market Cap: £15.9 billion

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