The BT share value jumped one other 5% this week. Was I fallacious to promote?

I bought my BT Group (LSE: BT) shares final month regardless of the share value climbing 16% this 12 months. Whereas I don’t essentially remorse the sale, I’m now questioning if I ought to have held on to them.

One main firm thinks so: Bharti International just lately introduced plans to purchase a 24.5% stake in BT. The Indian multinational conglomerate is a mother or father firm of Bharti Airtel, the bulk proprietor of the UK-listed telecoms firm Airtel Africa.

My sale was a part of a method to scale back my variety of holdings and rebalance the capital into defensive shares. Whereas it helped to decrease my danger rating, it additionally decreased my common dividend by stripping out BT’s respectable 5.5% yield.

So on reflection, was it the precise alternative?

Digital delays

My foremost concern about BT is the danger it poses with its weighty debt load. Years of funding into the group’s plans for a totally digital UK community have left it in a deep gap. The hassle has been additional delayed by disruptions, prompting the group to increase its anticipated completion date to the top of January 2027.

How far more debt will that add to its present sum of £18.5bn? 

The determine is already significantly increased than its £14.3bn market cap. After all, I’m not apprehensive that an organization as established as BT will fail. However in my expertise, debt and dividends don’t play effectively collectively. 

How lengthy earlier than it begins slicing dividends to satisfy debt obligations? It wouldn’t be the primary time — BT has reduce, decreased, or paused dividends 9 instances because the millennium started.

Conserving afloat

For now, issues look okay. Working revenue (EBIT) is ample to cowl curiosity funds by 3.7 instances and the group’s annual 8p dividend per share is just under earnings per share (EPS). 

There’s no fast purpose to suppose issues will flip south.

One promising metric is BT’s excessive earnings progress potential. Future money circulation estimates put the share value at 73% beneath honest worth. With earnings anticipated to extend 68% within the coming 12 months, the group’s ahead price-to-earnings (P/E) ratio is 10.3. Even its trailing P/E ratio of 16.7 is beneath the trade common.

The valuation is much like that of competitor Vodafone, with a P/E ratio of 19.2 and a share value undervalued by 69%. And as soon as Vodafone slashes its dividend to five% subsequent 12 months, the 2 corporations will probably be very effectively matched (barring the excessive debt-to-equity ratio). 

The underside line

From a risk-averse viewpoint, I don’t really feel I used to be too hasty promoting my BT shares. If all the pieces goes easily with the digital improve, I’ll come to remorse the choice. BT seems to have respectable progress potential so if it may well keep away from additional disruption, I believe a 12-month value goal of 200p isn’t unrealistic.

That mentioned, it might be some time earlier than I’m tempted to purchase again into the inventory. Till it exhibits indicators of constructing severe inroads to decreasing its debt, I’m selecting to err on the facet of warning.