BT's [BT] share price is down over 2% since Thursday's close, when the company announced its full-year earnings results. And while the group have kept its full-year dividend unchanged at 15.4p per share, analysts have raised questions about how the company will fund a step-up in optic fibre roll-out if not by reeling in payouts over the next few years.
In his first earnings update in the role, CEO Philip Jansen, formerly of Worldpay, struck a benevolent note with shareholders by keeping the dividend flat for 2018-19, despite a 4.7% interim dividend cut in November at the hand of predecessor Gavin Patterson.BT 1-year share price performance, CMC Markets, 14 May 2019
At the same time, he was bullish on fibre deployment, raising targets for fibre-connected premises from 3 million to 4 million by 2021, and from 10 million to 15 million by the middle of the decade.
Some analysts, such as Berenberg, had forecast a cut to payouts in order to finance investment and contain debt. That scenario has been avoided, and Jansen pledged to keep payouts flat in 2019-20, too. But ballooning capex will weigh on cashflow, and by Jansen’s own admission, there is no guarantee as to when the fibre investment will bring a return, and of what size.
Uncertainties around the investment…
Ahead of results, Morgan Stanley analysts suggested that a move to separate Openreach, the group’s telecoms infrastructure company, from the rest of BT would be “most well received”.
As it turned out, Jansen not only dismissed the idea of spinning out the unit – which he described as “the biggest differentiator between us and our peers” – but made it the linchpin of future BT’s growth thanks to the aggressive new targets for fibre connectivity. “What I'm not hesitating on is, we have to do fibre,” he told analysts. “[It] is a no-brainer.”
“What I'm not hesitating on is, we have to do fibre ... [It] is a no-brainer.” - CEO Philip Jansen
That won’t come cheap. Speeding up roll-out to reach 4 million premises by 2021 will require £100m extra in capex per year, and Jansen guided for between £3.7-3.9bn this year alone. He declined to say how the board would fund the ramp-up for the mid-2020s target of 15 million, but reassured analysts that a dividend cut would not necessarily be the go-to option.
“You could increase lending, there may be more transformation benefits, you might reprioritise capital,” he said. “And then, as part of that, you look at the dividend, of course you have, but it's way too early to speculate on that at this stage.”
…and the returns
BT and telecoms regulator Ofcom have been butting heads over the extent to which Openreach’s fibre network should be forced open to BT competitors, and on how much the company can charge when leasing out lines. It will be absolutely crucial, Jansen said, that “the regulatory framework is in place to enable us to receive a fair risk-adjusted return on our investment”.
“Openreach is an attractive, high-margin business, but the regulator will always want more for less,” wrote George Salmon at Hargreaves Lansdown. “Jansen’s increased target … is dependent on regulators brokering what he sees as a fair deal.”
“Jansen’s increased target … is dependent on regulators brokering what he sees as a fair deal.” - George Salmon, Hargreaves Lansdown
Asking for patience
Analysts don’t doubt that the fibre investment is justified in the long-term, and even see it as an opportunity to lift top line at the consumer division, where competitive pressures have taken their toll. “BT has proven adept at bundling home, TV and broadband together, and successful marketing could drive further gains,” wrote Salmon.
|PE ratio (TTM)||9.44|
|Quarterly earnings growth (YoY)||-28.90%|
BT share price vitals, Yahoo finance, 14 May 2019
Shareholders have been far less enthusiastic, sending the share price down some 8% in the 24 hours following results. Jansen admitted that uncertainty around returns is a concern, but reiterated that becoming a fibre leader was the only way BT could retain a competitive position.
“The things I've laid out are effectively no-brainer decisions in my mind. We just have to do those. I am confident they will deliver good returns,” he said. “I just don't know exactly what they are … and that's a problem.”