BT (BT.L) Stock Purchase – A proxy of the British consumer

In a recent post outlining my Astrazeneca share purchase, I mentioned that I had bought shares in BT as well. I bought 272 shares at a stock price of 397. Since then, the BT share price has gyrated bouncing up and down between a stock price of 450 and 350. A movement within such a large range over a short period of time is rare for blue chip stocks and it is fair to say that BT has been volatile in the wake of the Brexit vote.

Talking about Brexit, British focussed businesses have faced the biggest brunt in term of decreased valuations. FTSE 250 companies along with Banks, Insurers and House builders have seen their stock prices drop the most. This is because many forecast that Brexit is bad for the UK economy. Whilst I do believe that the economy will take a hit in the short term, the market is overreacting as always and the fear is overblown. BT, which is essentially a proxy for british prosperity with its multimedia and telecoms business, has been affected by all the fear mongering and seen its share price drop to levels that are attractive to long-term value oriented investors. I really do believe that investors who jump into BT in the 300’s price point will be able to compound their returns at a greater annual rate than the overall market. Now is the time the time for the slow and patient to invest. Now is the time for value investors to jump into BT.

Looking at the financials, BT appears to be in terrific shape. It has grown earnings per share by 41% over the last 5 years and it has increased its dividend per share by over 68% within this time scale. The current dividend paid by BT is 15p a share which offers a a yield of 3.72%.

Whilst the yield offered by BT is low compared to the overall market, i do believe that BT offers a safe dividend with growth potential. The current pay-out ratio is only 50% which means that the company could afford to increase its dividends even if profits per share stayed at the same level. Further, the company is fairly defensive by nature, so cash flow is expected to remain resilient no matter the conditions of the economy. BT owns the telephone lines and cables that bring internet connectivity to businesses and homes. This means that if you live in the UK and have an internet connection, BT is receiving money somewhere along the line. BT acts almost as a toll-booth for internet connectivity here in the UK. Internet providers have to pay it rent in order to use its infrastructure. This makes BT an excellent investment in an ever more connected world.

Apart from its traditional landline and internet business areas, BT entered the mobile industry with its acquisition of EE last year. I believe this to be a good move as EE is well run and by far the best mobile operator in the UK in terms of customer satisfaction levels. I believe that the mobile part of the business will only grow in the years to come.

The one part of the business that could go either way is the multimedia and home entertainment division. Although customers have been flocking to get a BT TV package over the past two years, I can’t help the fact that I feel that BT has overpaid for the rights to Broadcast the FA Premier League and the UEFA Champions League. having said this, most people I know who’ve switched to BT from Sky have done so for the sole reason of getting access to the Premier League and Champions League. I too only have BT sports for this reason. So maybe, it was not a bad idea by BT to bet big on these two football products.

The one area of real concern BT gives me is its pension deficit. It sees that every other company I study in the UK has a large pension deficit due to the over generous defined benefit, schemes offered by these companies in years gone by. Even, when I analysed AstraZeneca, by far the biggest concern was the pension deficit. When it comes to BT, the pension shortfall is far bigger than I have seen for other companies which are of similar size. Although I do believe that BT has the resources to plug this deficit in the years to come, this is an area that i will definitely be keeping an eye on.

Whilst the pension deficit is a concern, it hasn’t deterred me from investing in BT. I believe that this is already priced into the stock and at current levels, the value offered by BT is too good to miss out on. This is why I sank close to £1100 in BT.L in order to get my hands on 272 shares. With a dividend of 15p a share, I am expecting to get close to £41 in dividends over the coming year. And with the expectations that the will increase the dividend over the next year by 10%, the amount I receive from the company will only get bigger with time.

Mr Woodford sold his shares in BT, should I sell mine?

After I bought my shares in BT, I learnt that Neil Woodford, one of Britain’s top fund managers, has sold his shares in the company. Whilst Mr Woodford is highly regarded and him having sold Tesco right before its share price crash over two years ago, it is tempting for an average investor like me to follow Woodford’s lead and sell my shares in BT. But I do not intend to sell my shares in BT any time soon. Here are two reasons why you should not blindly follow mutual fund managers, even the best of them, into trades.

  1. Price is an important determinant if a stock is a buy or sell – Neil Woodford sold his shares in BT in May, when the price was hovering around 450p a share. On the other hand, I was able to buy shares at a more than 10% discount to that at 397p a share.
  2. Time horizon is an average investors biggest advantage – whilst mutual fund manager are judged on an almost quarterly basis, I as an individual investor am judged by no one and thus can truly invest for the long-term. Neil Woodford knew that in the event of brexit, the BT share price would fall heavily and thus he aimed to get out even though it still offered great value.
  3. Raise cash for other better opportunities – Sometimes mutual fund managers simply sell a stock because other stocks offer better value at that particular time. Mr wood ford sold his stake in pharmaceutical company Roche last year in order to pursue better opportunities and then started building his stake again this year.

When it comes to investing, it is imperative that you think for yourself. Don’t let Wall street analysts or fund managers make the decisions for you. You don’t know their motivates and they are not always right. By thinking for yourself, you can get a higher conviction towards a particular stock and this can help you avoid selling it at the bottom.

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