As a long-term investor, I like to look at share price performance over several years, not just the past 12 months. For BT Group (LSE:BT), this doesn’t make for great reading. BT shares are down 50% over the past five years and down 8% over the past year. Yet there are several reasons why I think this could be a great value buy right now.
High income allure
To begin with, the share price fall has helped to increase the dividend yield. The yield calculation takes into account the dividend per share and the current share price. Even though the dividend per share amounts haven’t really changed much over the past couple of years, the yield has been rising as the share price has been falling.
It’s currently at 6.6%. This is higher than the FTSE 100 average of 3.8% and higher than the current bank base rate of 5.25%.
So, for some investors who think the stock is undervalued but that it could take years to come good, this is a good point to consider. To be able to pick up a good yield while waiting for a share price recovery is a huge benefit in my opinion.
Low P/E ratio
Despite the stock halving in value over five years, it’s key to think about how this corresponds to earnings. For example, if earnings have fallen by the same proportion, then BT shares are fair value.
The price-to-earnings (P/E) ratio is a perfect tool to help me figure this out. A fair value in my eyes is 10. In fact, the current ratio for BT is 5.99.
This highlights to me that the stock is undervalued relative to earnings. Reported profit before tax in the half-year release was £1.1bn, up 29% versus the prior year. If this momentum continues then the ratio will get even cheaper if the stock price doesn’t rally.
As a point to note, it can be sometimes dangerous to take one financial ratio as standalone evidence of value. I need to ensure I look at this along with other factors before making a decision.
Looking at the future
Finally, when I look to the future I’m optimistic that the value is much greater than currently appreciated. The expansion of full fibre broadband (FTTP) has huge potential. The latest report showed that demand in Openreach for FTTP is at a 33% take-up rate. I think this could increase massively over the coming year.
The retail FTTP base grew year on year by 48% and this too has the legs to scale quickly. This will all translate down to higher revenue and profitability for the group.
I’ve flagged up some risks already, but I believe BT shares are trading at a 50% discount given where they were five years ago versus where I think they could be in five years’ time. On that basis I’m thinking about adding the stock to my portfolio shortly.
The post Why buying BT shares now could be like buying a £1 coin for 50p appeared first on The Motley Fool UK.
Pound coins for sale — 51 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Is the beaten-down BT share price ever going to recover?
Is the BT share price a bargain hiding in plain sight?
Here’s why the BT share price rose 10% in 2023
Will falling interest rates help the BT share price?
Can these big dividend forecasts send the BT share price climbing?
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
