BT shares leap in 2023. Are they still a bargain?

Until now, BT (LSE: BT.A) shares have done well in 2023. The telecoms giant has seen its share price rise from around 112p at the start of January to around 153p today.

But to put the move into context, the stock has been more or less unchanged over the past 12 months. So the price is volatile.

And there is still a long way to go for the share price to climb back to the high of 490p, last seen around November 2015.

Indeed, long-term shareholders will still be underwater despite the new stock’s strength.

Is it cheap, or what?

But since BT has gone down over the past few years, it might still be worth it today. And maybe the stock is cheap.

It looks cheap in some numbers. For example, the expected price-to-earnings multiple is running at just over eight for the current trading year to March 2024. And the anticipated dividend yield is around 5%.

But valuation multiples start to look less attractive when you consider the company’s debt pile.

And after a good increase in earnings during the trading year that ended in March, analysts expect a decline of around 8% this year.

Therefore, BT looks like it is returning to the familiar pattern of annual reduction in earnings that stretches back as far as 2017. Indeed, the only year in which earnings have recently risen, is one that has just ended.

Meanwhile, one way to see a company’s performance in terms of value is by examining its dividend records. And, sadly, the forecast dividend of 7.79p per share for the current year is about half of the payout for 2017.

The dividend situation is one result of the operational difficulties the business has experienced over the past few years. And the medium-term decline in stock prices is another consequence of declining earnings.

Improve operational efficiency

But the company has made moves to improve operating efficiency.

For example, from 1 April, BT began reporting its former Enterprise and Global business units as a single entity. The new expanded unit is known as BT Business. And directors expect the move to add value to business-to-business (B2B) customers.

In addition, these changes should strengthen the company’s competitive position, and provide material synergies in operations.

Directors estimate the new unit will deliver around £100m of gross annual savings by the end of the trading year to March 2025.

But BT needs cost savings wherever possible. The company has suffered from inflation and rising expenses like businesses in other sectors.

And on top of that, the cost of rolling out ultra-fast full fiber internet and 5G networks is huge. And the requirement for continuous capital investment never ends in the telecommunications game – as soon as one investment program ends, the next upgrade begins.

In conclusion, I don’t see BT shares as a bargain at the moment. The company can continue to grow and improve financial results for its shareholders. But there are also many risks here.